NOTICE OF MERGER
OF
DIGITAL DICTATION, INC.
WITH AND INTO
TRANSCRIPTIONS, LTD.
(A WHOLLY-OWNED SUBSIDIARY OF MEDQUIST INC.)
To the Stockholders of Digital Dictation, Inc.:
We are pleased to give you notice that, pursuant to Section 252 of the
General Corporation Law of the State of Delaware and Section 14A:10-7 of the
Business Corporation Act of the State of New Jersey, Digital Dictation, Inc.
("DDI"), a Delaware corporation, intends to merge (the "Merger") with and into
Transcriptions, Ltd. ("TL"), a New Jersey corporation and a wholly-owned
subsidiary of MedQuist Inc. ("MedQuist"), a New Jersey corporation, on July 31,
1998 (the "Effective Time"). Under applicable Delaware and New Jersey law, the
Merger will be effected pursuant to an Agreement and Plan of Merger dated May
28,1998 between MedQuist, TL, DDI and certain stockholders of DDI (the "Merger
Agreement"). The Merger Agreement and the Merger were approved by the board of
directors of DDI and the holders of a majority of the outstanding common stock
of DDI, and no further action is required by the remaining DDI stockholders for
the Merger to become effective.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
Upon consummation of the Merger, TL will be the surviving corporation, and
the separate corporate existence of DDI will cease. Each outstanding share of
DDI common stock, $.01 par value per share ("DDI Common Stock") (except for
shares held by TL, which will be canceled, and shares held by stockholders who
perfect their statutory appraisal rights under Delaware law and who do not
withdraw such rights), will be converted in the Merger to 0.1440899 shares of
MedQuist common stock, no par value per share ("MedQuist Common Stock"). Each
issued and outstanding option to acquire shares of DDI Common Stock will be
canceled and extinguished and will be converted into an option to purchase that
number of shares of MedQuist Common Stock that is equal to the number of shares
of DDI Common Stock to which such option relates times 0.1440899.
To receive certificates representing shares of MedQuist Common Stock issued
in the Merger, DDI stockholders must complete and execute the enclosed Letter of
Transmittal and deliver their certificates representing DDI Common Stock and the
Letter of Transmittal to American Stock Transfer & Trust Co., the Exchange
Agent, either in person or by mail, at the following address:
American Stock Transfer & Trust Co.
40 Wall Street
46th Floor
New York, New York 10005
Section 262 of the General Corporation Law of the State of Delaware, the
text of which is included as Annex A to the accompanying Prospectus, provides a
procedure by which holders of record of DDI Common Stock at the Effective Time
who do not wish to accept the shares of MedQuist Common Stock to which they are
entitled under the terms of the Merger may seek a judicial appraisal of the fair
value of their DDI Common Stock, exclusive of any element of value arising from
the expectation or accomplishment of the Merger. See "The Merger--Appraisal
Rights" in the Prospectus and Annex A thereto for a description of this
procedure. The Prospectus describes the terms of the Merger, certain background
information and other information concerning DDI and MedQuist. We urge you to
read the Prospectus carefully.
Very truly yours,
Digital Dictation, Inc.
David A. Cohen
President
<PAGE>
PROSPECTUS
[MEDQUIST LOGO]
1,060,061 Shares
Common Stock
(All shares and share prices in this Prospectus
have been adjusted to reflect a two for one
stock split effected on June 15, 1998)
See "Risk Factors" beginning on page 1, for a discussion of certain
factors that should be considered by prospective acquirors of the shares of
Common Stock offered hereby.
MedQuist Inc. ("MedQuist"), a New Jersey corporation, is furnishing this
Prospectus to those persons, other than Transcriptions, Ltd ("TL"), a New Jersey
corporation and a wholly-owned subsidiary of MedQuist, who hold common stock,
$.01 par value per share ("DDI Common Stock"), of Digital Dictation, Inc.
("DDI"), a Delaware corporation, immediately prior to the merger (the "Merger")
of DDI with and into TL with respect to the shares of MedQuist common stock, no
par value per share ("MedQuist Common Stock"), to be issued in the Merger. DDI
and TL intend to effect the Merger on July 31, 1998. Immediately prior to the
Merger, TL owns approximately 93.4 percent of the outstanding shares of DDI
Common Stock, which TL acquired in connection with the execution of an Agreement
and Plan of Merger among MedQuist, TL, DDI and certain stockholders of DDI (the
Merger Agreement"). Upon consummation of the Merger, TL, will be the surviving
corporation, and the separate corporate existence of DDI will cease. Each share
of DDI Common Stock outstanding upon consummation of the Merger (except for
shares held by TL, which will be canceled, and shares owned by stockholders who
perfect their statutory appraisal rights under Delaware law) will be converted
in the Merger into the right to receive 0.1440899 shares of MedQuist Common
Stock. Each issued and outstanding option to acquire shares of DDI Common Stock
will be canceled and extinguished and will be converted into an option to
purchase that number of shares of MedQuist Common Stock that is equal to the
number of shares of DDI Common Stock to which such option relates times
0.1440899. Under applicable Delaware law, the Merger was approved by the board
of directors of DDI and the holders of a majority of the outstanding common
stock of DDI, and no further action is required by the remaining DDI
stockholders for the Merger to become effective.
Persons who hold DDI Common Stock of record immediately prior to the Merger
have certain statutory appraisal rights under Delaware law. Any holder who
desires to exercise appraisal rights must file with TL a written demand for
appraisal prior to July 22, 1998. See "The Merger--Appraisal Rights."
This Prospectus also constitutes a notice to the DDI stockholders of the
general terms and conditions and the effective date of the Merger and of the
appraisal rights available to former DDI stockholders as a result of the Merger.
MedQuist Common Stock is traded on the Nasdaq National Market under the
symbol "MEDQ." DDI Common Stock is traded on the Nasdaq Bulletin Board under the
symbol "DGDT." On May 28, 1998, the last trading day prior to the public
announcement that MedQuist intended to effect the Merger, the closing prices of
MedQuist Common Stock and DDI Common Stock were $21.875 (adjusted to reflect a
two for one stock split effected on June 15, 1998) and $2.875, respectively. On
June 26, 1998, the closing prices of MedQuist Common Stock and DDI Common Stock
were $27.9375 and $2.875, respectively. DDI stockholders should obtain current
quotes for MedQuist Common Stock and DDI Common Stock. See "The Merger -- Nasdaq
Listing" and "Market Price Information."
This Prospectus also covers 1,000,000 shares of MedQuist Common Stock (the
"Additional Shares") that may be offered and issued by MedQuist from time to
time in connection with the merger or acquisition by MedQuist of other
businesses or assets, and which may be reserved for issuance pursuant to, or
offered and issued upon exercise or conversion of, warrants, options,
convertible notes or other similar instruments issued by MedQuist from time to
time in connection with such mergers or acquisitions. It is expected that the
terms of acquisitions involving the issuance of the Additional Shares will be
determined by direct negotiations with the owners or controlling persons of the
businesses or assets to be merged with, or acquired by, MedQuist, and that the
Additional Shares will be valued at prices reasonably related to market prices
current either at the time a merger or acquisition is agreed upon or at or about
the time of delivery of the shares. No underwriting discounts or commissions
will be paid, although finder's fees may be paid from time to time with respect
to specific mergers or acquisitions. Any person receiving such fees may be
deemed to be an Underwriter within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"). All expenses of this offering will be paid by
MedQuist.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JULY 2, 1998.
<PAGE>
Persons receiving the Additional Shares of MedQuist Common Stock offered
hereby may be contractually required to hold some portions of those shares for
periods of up to two years. In addition, pursuant to the provisions of Rule 145
under the Securities Act, the volume limitations and certain other requirements
of Rule 144 under the Securities Act may apply to resales of those shares by
affiliates of the businesses MedQuist acquires for a period of one year from the
date of acquisition of the shares of Common Stock (or such shorter period as the
Securities and Exchange Commission may prescribe).
AVAILABLE INFORMATION
MedQuist has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 under the Securities Act,
with respect to the securities offered hereby (the "Registration Statement").
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto, to which reference is hereby
made.
MedQuist and DDI are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, MedQuist and DDI file reports, proxy statements and other
information with the Commission.
The Registration Statement and the reports, proxy statements and other
information filed by MedQuist and DDI with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and should be available at
the Commission's Regional Offices at Suite 1300, 7 World Trade Center, New York,
New York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials also can be obtained at
prescribed rates from the Public Reference Section of the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the
Commission maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants,
including MedQuist and DDI, that file electronically with the Commission. The
common stock of MedQuist is traded on the Nasdaq National Market and certain
reports, proxy materials and other information of MedQuist may be available for
inspection at the offices of the Nasdaq Stock Market, 1735 K Street N.W.,
Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WITH RESPECT TO
MEDQUIST WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY
SUCH DOCUMENTS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY
INCORPORATED BY REFERENCE THEREIN, ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS STATEMENT IS DELIVERED, UPON
WRITTEN OR ORAL REQUEST. WRITTEN REQUESTS FOR SUCH DOCUMENTS SHOULD BE DIRECTED
TO THE CORPORATE SECRETARY, MEDQUIST INC., FIVE GREENTREE CENTRE, SUITE 311,
MARLTON, NEW JERSEY 08053, AND TELEPHONE REQUESTS MAY BE DIRECTED TO THE
CORPORATE SECRETARY AT (609) 596-8877. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY JULY 17, 1998.
The following documents previously filed with the Commission pursuant to
the Exchange Act are incorporated herein by this reference: (i) MedQuist's
Annual Report on Form 10-K for the year ended December 31, 1997 (including those
portions of MedQuist's proxy statement for its 1998 annual meeting of
shareholders incorporated by reference therein) ("MedQuist's Annual Report");
(ii) MedQuist's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998; (iii) MedQuist's Current Reports on Form 8-K dated May 11, 1998 and May
28, 1998; and (iv) the description of MedQuist Common Stock in MedQuist's
Registration Statements filed pursuant to Section 12 of the Exchange Act, and
any amendment or report filed for the purpose of updating any such description.
ii
<PAGE>
All documents filed by MedQuist pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to
July 22, 1998, the last day on which appraisal rights may be perfected,
shall be deemed to be incorporated by reference herein and to be a part hereof
from the date any such document is filed.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that also is incorporated by reference herein)
modifies or supersedes such statement. Any statement so modified or superseded
shall be deemed, except as so modified or superseded, to constitute a part
hereof. All information appearing in this Prospectus is qualified in its
entirety by the information and financial statements (including notes thereto)
appearing in the documents incorporated herein by reference, except to the
extent set forth in the immediately preceding statement.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROSPECTUS OTHER
THAN THE INFORMATION CONTAINED IN THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY MEDQUIST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO OR SOLICITATION OF ANY PERSON IN ANY
JURISDICTION WHERE IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY ISSUANCE OF ANY SECURITIES
DESCRIBED HEREIN SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE CORPORATION SUBSEQUENT TO THE
RESPECTIVE DATES AS OF WHICH INFORMATION IS GIVEN HEREIN.
iii
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION ........................................................ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ..............................ii
TABLE OF CONTENTS ............................................................iv
FORWARD-LOOKING STATEMENTS ....................................................1
RISK FACTORS ..................................................................1
Risks Associated With Acquisitions Generally .............................1
Risks Associated With The Acquisition of DDI .............................1
Uncertainty of Merger Consideration ......................................1
Fixed Exchange Ratio .....................................................2
Dependence on Key Personnel ..............................................2
Rapid Technological Change ...............................................2
Ability to Attract Qualified Transcriptionists ...........................2
Potential Additional Employment Costs ....................................3
Potential for Significant Fluctuations in Quarterly Operating Results ....3
Potential Volatility of Stock Price ......................................3
Dependence on Single Line of Business ....................................3
Changes in the Healthcare Industry .......................................4
Inability to Expand Into New Markets .....................................4
Competition ..............................................................4
Dependence on Proprietary Rights; Risks of Infringement ..................5
Confidentiality Requirements .............................................5
Year 2000 ................................................................5
Certain Anti-Takeover Provisions .........................................6
SUMMARY .......................................................................7
General ..................................................................7
The Companies ............................................................7
The Merger Agreement .....................................................8
The Merger ...............................................................8
Effect of Merger on DDI Common Stock .....................................8
Merger Consideration .....................................................8
Treatment of DDI Stock Options ...........................................9
Surviving Representations and Warranties; Escrowed Shares ................9
Certain Consequences of the Merger .......................................9
Regulatory Approvals .....................................................9
Conduct of the Business of MedQuist and TL after the Merger .............10
Interests of Certain Persons in the Merger ..............................10
Appraisal Rights ........................................................10
Certain Federal Income Tax Consequences .................................10
Accounting Treatment ....................................................11
Registration Rights .....................................................12
Comparison of Shareholder's Rights ......................................12
SELECTED HISTORICAL FINANCIAL DATA OF MEDQUIST ...............................13
SELECTED HISTORICAL FINANCIAL DATA OF DDI ....................................14
iv
<PAGE>
SELECTED UNAUDITED PROFORMA COMBINED FINANCIAL DATA . ........................15
COMPARATIVE PER SHARE DATA ...................................................16
MARKET PRICE INFORMATION .....................................................17
DIVIDEND POLICIES ............................................................18
INFORMATION CONCERNING MEDQUIST ..............................................19
Background ..............................................................19
Industry Overview .......................................................19
Strategy ................................................................20
The MedQuist Integrated System ..........................................21
Technology Development ..................................................21
Clients .................................................................22
Sales and Marketing .....................................................22
Competition .............................................................22
Employees ...............................................................23
Government Regulation ...................................................23
Intellectual Property ...................................................24
Year 2000 Compliance ....................................................24
General Information Concerning MedQuist .................................24
INFORMATION CONCERNING DDI ...................................................25
Background ..............................................................25
Centralized Management System ...........................................25
Customer Contracts ......................................................25
Proprietary Software ....................................................25
Year 2000 Compliance ....................................................26
Description of Property .................................................26
Legal Proceedings .......................................................26
Management's Discussion and Analysis of Financial Condition and
Results of Operations as of March 31, 1998 ............................26
Management's Discussion and Analysis of Financial Condition and
Results of Operations as of December 31, 1997 .........................27
Revenues ................................................................27
Financial Condition .....................................................28
Results of Operations ...................................................28
Changes in and Disagreements with Accountants ...........................29
General Information Regarding DDI .......................................29
THE MERGER ...................................................................30
Terms of the Merger Agreement ...........................................30
The Merger ..............................................................30
Conversion of Shares; Exchange of Stock Certificates;
No Fractional Amounts .................................................30
Treatment of DDI Stock Options ..........................................31
Surviving Representations and Warranties; Escrowed Shares ...............31
Registration Rights ....................................................32
Background of the Merger ................................................32
MedQuist's Reasons for the Merger ......................................33
v
<PAGE>
DDI's Reasons for the Merger ............................................35
Certain Consequences of the Merger .....................................36
Interests of Certain Persons in the Merger ..............................37
Accounting Treatment ....................................................37
Certain Federal Income Tax Consequences .................................37
Regulatory Approvals ....................................................38
Nasdaq Listing ..........................................................38
Appraisal Rights ........................................................38
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION ...........................42
COMPARISON OF SHAREHOLDERS' RIGHTS ...........................................49
Size and Classification of the Board of Directors .......................49
Removal of Directors ....................................................49
Special Meeting of Stockholders; Action by Written Consent ..............49
Stockholder Inspection Rights; Stockholder Lists ........................50
Amendment of Governing Documents ........................................50
Corporation's Best Interest .............................................50
Required Vote for Authorization of Certain Actions ......................51
Business Combinations ...................................................51
MANAGEMENT OF MEDQUIST AND TL UPON CONSUMMATION OF THE MERGER ................53
PLAN OF DISTRIBUTION OF ADDITIONAL SHARES ....................................53
LEGAL MATTERS ................................................................53
EXPERTS ......................................................................53
INDEX TO DDI FINANCIAL STATEMENTS ...........................................F-1
ANNEX A DELAWARE GENERAL CORPORATION LAW SECTION 262. APPRAISAL RIGHTS ......A-1
ANNEX B AGREEMENT AND PLAN OF MERGER ........................................B-1
vi
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "expect" and similar expressions, as they
relate to MedQuist or its management, are intended to identify such
forward-looking statements. MedQuist's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include those discussed below. See "Risk Factors." DDI
stockholders should carefully consider such factors as well as the other
information set forth in this Prospectus in evaluating the shares of MedQuist
Common Stock offered by this Prospectus.
RISK FACTORS
Risks Associated With Acquisitions Generally
MedQuist acquired TL in May 1994 and since that time has made 15 other
acquisitions of smaller transcriptions companies, including DDI. MedQuist's
continued growth strategy anticipates additional acquisitions. In connection
with that strategy, MedQuist is registering an additional 1,000,000 shares of
its common stock in a delayed or continuous offering to provide registered
shares for future 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. There can be no assurance that MedQuist will be successful in its
efforts to identify suitable acquisition candidates, finance such acquisitions,
negotiate terms favorable to MedQuist for, or to consummate, any such
acquisition or, if any such acquisition is consummated, to integrate the
acquired businesses into MedQuist's operations. In addition, MedQuist cannot
assure that a given acquisition, if consummated, will not have a material
adverse effect on MedQuist's business, financial condition and results of
operations.
Risks Associated With The Acquisition of DDI
One of the reasons for the acquisition of DDI is the opportunity to
achieve operating efficiencies as a result of the combination of the two
companies. No assurance can be given that difficulties will not be encountered
in the integration of the operations of DDI into TL, or that the benefits and
attendant cost savings possible from such integration ultimately will be
realized. Any delays or unexpected costs incurred in connection with such
integration could have a material adverse effect on the results of operations or
financial condition of MedQuist. In addition, because DDI maintains a
centralized processing system, if DDI's facility in Vienna, Virginia is
destroyed, DDI would be unable to provide services to its customers until the
facility were again operational.
Uncertainty of Merger Consideration
Ten percent of the shares of MedQuist Common Stock to be issued to the DDI
stockholders pursuant to the Merger Agreement will be held in escrow until the
earlier of (i) the completion of the first independent audit of the consolidated
financial statements of MedQuist in which the surviving corporation's financial
statements are included, or (ii) one (1) year from the date of the Merger
Agreement. TL may make a claim against the escrowed shares in the event of a
breach of certain of the representations and warranties contained in the Merger
Agreement as described herein. If it is determined that a surviving
representation and warranty has been breached, then TL will be entitled to
receive from the escrow a number of shares of MedQuist Common Stock equal in
value to the amount of TL's damages. Therefore, the potential exists that each
DDI stockholder could lose up to ten percent of the consideration such
stockholder was to receive in the event of such a breach. See "Terms of the
Merger Agreement -- Surviving Representations and Warranties; Escrowed Shares."
1
<PAGE>
Fixed Exchange Ratio
The exchange ratio of 0.1440899 is a fixed exchange ratio and will not be
adjusted in the event of any increase or decrease in the market price of either
MedQuist Common Stock or DDI Common Stock between the date hereof and the
Effective Time. The price of MedQuist Common Stock at the Effective Time may be
higher or lower than its price on the date hereof. Such variations may be the
result of changes in the business, operations or prospects of MedQuist or DDI,
market assessments of the likelihood that the Merger will be consummated and the
timing thereof, general market and economic conditions or other factors.
Stockholders are urged to obtain current market quotations for MedQuist Common
Stock and DDI Common Stock.
It is expected that the market price of MedQuist Common Stock will
fluctuate between the date of this Prospectus and the date on which the Merger
is consummated and thereafter. Because the number of shares of MedQuist Common
Stock to be received by DDI stockholders in the Merger is fixed and because the
market price of MedQuist Common Stock is subject to fluctuation, the value of
the shares of MedQuist Common Stock that holders of DDI Common Stock would
receive in the Merger may increase or decrease prior to the Merger. For further
information concerning the historical market prices of MedQuist and DDI Common
Stock, see "Market Price Information." No assurance can be given concerning the
market price of MedQuist Common Stock before or after the Effective Time.
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 healthcare 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, and the emergence of new
technical standards could render some or all of MedQuist's services as
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. There can be no
assurance that MedQuist 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, would have a material adverse effect on
MedQuist's business, financial condition and results of operations.
Ability to Attract 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. No assurance can be given that MedQuist 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 would have a material adverse effect upon MedQuist's
business, financial condition and results of operations. See "Information
Concerning MedQuist Employees."
2
<PAGE>
Potential Additional Employment Costs
MedQuist and DDI take the position that its transcriptionists are
independent contractors for state tax, benefits and unemployment purposes and
statutory employees for federal income tax and social security tax purposes.
Each of MedQuist's and DDI's position may be disputed by federal and state
officials, which, if successful, could result in the incurrence of additional
employment costs and penalties by MedQuist, and could have a material adverse
effect on MedQuist's business, financial condition and results of operations.
See "Information Concerning MedQuist -- Employees."
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 should not be relied upon as an indication of future
results of operations. In addition, MedQuist's transcription business has
experienced growth in recent periods as a result of both internal growth and
acquisitions, and there can be no assurance that the rate of growth in revenues
and profits achieved by MedQuist's transcription business in recent periods can
be maintained in the future. Due to the foregoing factors, it is possible that
in future quarters MedQuist's operating results will be below the expectations
of public market analysts and investors. Such an event would 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, highly volatile. Factors such as announcements with respect to healthcare
reform measures, acquisitions and operating results, announcements of
technological innovations or new products or services by MedQuist or its
competitors, government regulation, healthcare 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 healthcare service
companies that has often been unrelated to the operating performance of these
companies. These or other factors may adversely affect the market price of
MedQuist Common Stock. See "Market Price Information."
Dependence on Single Line of Business
MedQuist anticipates that its future revenues will be derived solely from
the business of providing electronic transcription services to hospitals and
other healthcare 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, would have a material adverse effect on MedQuist's
business, financial condition and results of operations, if not replaced with
another line of business.
3
<PAGE>
Changes in the Healthcare Industry
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the outsourcing arrangements of healthcare
providers. Many federal and state legislators from time to time announce
proposed programs to reform the United States healthcare system at both the
federal and state level. These programs may contain proposals to increase
governmental involvement in healthcare, lower reimbursement rates and otherwise
change the environment in which providers operate. Healthcare 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 healthcare providers
are consolidating to create larger healthcare delivery organizations. This
consolidation reduces the number of potential customers for MedQuist's services,
and the increased bargaining power of these organizations could lead to
reductions in the amounts paid for MedQuist's services. The impact of these
developments in the healthcare 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, healthcare 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
pricing may have to be adjusted 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
to 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. 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, the potential exists for large companies that do
not currently provide transcription services, but which currently provide other
services to the healthcare industry, to enter the transcription services field.
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 transcriptions 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's services also compete with the
in-house transcription staffs of potential customers. While MedQuist believes
that its growth and earnings have significantly benefited from the outsourcing
by healthcare providers off non-patient care functions, including transcription
services, the current trend could change direction and cause such healthcare
providers to bring all or some of those services in-house. Competition may
increase due to consolidation of transcription companies. In addition, 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. There can be no assurance that MedQuist will be able to compete
4
<PAGE>
successfully against current or future competitors or that competitive
pressures will not have a material adverse effect on MedQuist's business,
financial condition and results of operations. See "Information Concerning
MedQuist -- Competition".
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. There can be no assurance that the obligations
to maintain the confidentiality of MedQuist's 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 of disclosure, or that MedQuist's trade
secrets or proprietary information will not be independently developed by
MedQuist's competitors. There can be no assurance that any copyrights owned by
MedQuist will provide competitive advantages for MedQuist's products or will not
be challenged or circumvented by its 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. There can be no assurance that MedQuist would prevail in
any such litigation. See "Information Concerning MedQuist -- Intellectual
Property."
MedQuist is not aware that any of its software, trademarks, or other
proprietary rights infringe the proprietary rights of third parties. However,
there can be no assurance 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. See "Information Concerning MedQuist -
Intellectual Property."
Confidentiality Requirements
The medical information transcribed by MedQuist is of an extremely
sensitive nature. 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 on the external systems of its customers,
suppliers and other organizations with which it does business. Management is in
the process of assessing its internal and external systems to assure 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.
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<PAGE>
However, despite MedQuist's efforts thus far to address year 2000
compliance, MedQuist cannot guarantee that all internal or external systems will
be compliant, or that its business will not be materially adversely affected by
any such non-compliance.
Certain Anti-Takeover Provisions
The New Jersey Shareholders Protection Act prohibits MedQuist from entering
into certain business combination transactions with any stockholder 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 stockholder 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 Common Stock. MedQuist's
Certificate of Incorporation provides for staggered terms for the members of the
Board of Directors such that no more than one-third of its members stands for
reelection 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
1992 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 stockholders might otherwise receive a
premium for their shares over the then current market price and, therefore,
could adversely effect the market price of the Common Stock. See "Comparison of
Shareholders Rights -- Business Combinations."
6
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, CONTAINED ELSEWHERE, OR INCORPORATED BY
REFERENCE, IN THIS PROSPECTUS, THE ANNEXES HERETO AND THE LETTER OF TRANSMITTAL.
EXCEPT AS OTHERWISE INDICATED, ALL FINANCIAL INFORMATION IN THIS PROSPECTUS IS
PRESENTED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP").
STOCKHOLDERS ARE URGED TO READ THIS PROSPECTUS, THE ANNEXES HERETO, THE LETTER
OF TRANSMITTAL AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE IN THEIR
ENTIRETY. UNLESS OTHERWISE DEFINED HEREIN, CAPITALIZED TERMS USED IN THIS
SUMMARY HAVE THE RESPECTIVE MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS
PROSPECTUS.
General
This Prospectus relates to the shares of MedQuist Common Stock to be issued
to stockholders of DDI in connection with the Merger of DDI with and into TL.
DDI and TL intend for the Merger to be effective on July 31, 1998. See "The
Merger."
The Companies
MedQuist Inc. and Transcriptions, Ltd.
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
2,800 trained transcriptionists, MedQuist converts free-form medical dictation
into electronically formatted patient records which healthcare 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 1987 as a group of out-patient healthcare
businesses affiliated with a non-profit healthcare provider. By the end of 1995,
MedQuist had divested all of its non-medical transcription businesses. Since the
acquisition of TL, a wholly-owned subsidiary of MedQuist, in 1994, MedQuist has
acquired 15 smaller medical transcription companies. MedQuist's executive
offices are located at Five Greentree Centre, Suite 311, Marlton, New Jersey
08053, and the telephone number for MedQuist is(609) 596-8877. See
"Incorporation of Certain Documents by Reference," "Selected Historical
Financial Data of MedQuist," "Selected Unaudited Pro Forma Combined Financial
Information," and "Information Concerning MedQuist" for additional information
concerning MedQuist and TL.
Digital Dictation, Inc.
DDI provides electronic transcription and information management solutions
to institutional health care providers, including hospitals and emergency
medicine facilities located in various parts of the country. DDI's business
involves the transcription of medical reports that have been dictated by
physicians and other medical professionals, into computer readable form and/or
hard copy. DDI was organized as a Virginia corporation, originally under the
name Kabrumer Transcriptions, Inc., in April 1989 and, in May 1989, acquired
certain assets from Kabrumer Transcriptions ("Kabrumer"), a proprietorship
operating a traditional local medical transcription business serving the
Washington, D.C. market and, through a second office, the Pittsburgh market. The
name of the corporation was changed to Digital Dictation, Inc. in October 1989.
In October 1995, DDI merged with and into Sonochem, Inc., a publicly-held
Delaware corporation, at which time the surviving company changed its name to
Digital Dictation, Inc. Thereafter, DDI filed a Registration Statement on Form
10-SB with the Commission pursuant to which it became a reporting company under
Section 15(d) of the Exchange Act. DDI's principal executive offices are located
at 8230 Old Courthouse Road Vienna,
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<PAGE>
Virginia 22182, and its telephone number is (703) 848-2830. See "Information
Concerning DDI" and "Selected Historical Financial Data of DDI" for additional
information concerning DDI.
The Merger Agreement
On May 28, 1998, MedQuist and TL entered into an Agreement and Plan of
Merger (the "Merger Agreement") with DDI, Proactive Partners, L.P.
("Proactive"), Lagunitas Partners, L.P. ("Lagunitas"), Gruber & McBaine
International ("G&M") and Richard D. Cameron ("Cameron"). Prior to the execution
of the Merger Agreement, Proactive, Lagunitas, G&M and Cameron (collectively
referred to herein as the "Principal Shareholders") together owned 5,908,673
shares of DDI Common Stock, approximately 93.4 percent of the outstanding shares
of DDI Common Stock. Under the terms of the Merger Agreement, the Principal
Shareholders exchanged each of their shares of DDI Common Stock for 0.1440899
shares (a total of 851,376 shares) (adjusted to reflect a two for one stock
split effected on June 15, 1998) of MedQuist Common Stock upon execution of the
Merger Agreement.
The Merger
Pursuant to the Merger Agreement, on July 31, 1998 (the "Effective Time")
DDI will be merged with and into TL, with TL being the surviving corporation in
the Merger. At that time, DDI's separate corporate existence will cease. The
Merger was approved by the board of directors of DDI and the holders of a
majority of the outstanding common stock of DDI on May 28, 1998, and no further
action is required by the remaining DDI stockholders for the Merger to become
effective. Holders of DDI Common Stock immediately prior to the Merger, other
than TL, have certain statutory appraisal rights under Delaware law. See "The
Merger--MedQuist's Reasons for the Merger", "The Merger--Appraisal Rights" and
"The Merger--Terms of the Merger."
Effect of Merger on DDI Common Stock
Upon consummation of the Merger: (i) DDI will be merged with and into TL,
with TL being the surviving corporation; and (ii) each outstanding share of DDI
Common Stock (other than shares of DDI Common Stock held by TL, which will be
canceled, and shares held by stockholders who perfect their statutory appraisal
rights under Delaware law) will be converted into the right to receive the
Merger Consideration (as defined below). Fractional shares of MedQuist Common
Stock will not be issuable in connection with the Merger. DDI stockholders
otherwise entitled to fractional shares of MedQuist Common Stock will receive
the value of such fractional shares in cash, determined as described herein
under "The Merger--Terms of the Merger."
Merger Consideration
Upon the consummation of the Merger, each share of DDI Common Stock issued
and outstanding immediately prior to the Effective Time (other than shares of
DDI Common Stock held by TL, which will be canceled, and shares held by
stockholders who perfect their statutory appraisal rights under Delaware law)
will be converted into the right to receive 0.1440899 shares of MedQuist Common
Stock (the "Exchange Ratio"). The Exchange Ratio was determined as follows: (i)
TL and DDI first agreed that the price per share of DDI Common Stock in the
Merger would be $3.2033; and (ii) $3.2033 was then divided by $22.23125
(adjusted to reflect a two for one stock split effected on June 15, 1998) (the
"MedQuist Share Value"), the agreed value of a single share of MedQuist Common
Stock based upon contemporaneous trading. The MedQuist Common Stock issuable to
holders of shares of DDI Common Stock pursuant to the Merger and any cash to be
paid in lieu of fractional shares of MedQuist Common Stock are referred to
collectively as the "Merger Consideration." No fractional shares of MedQuist
Common Stock will be issued pursuant to the Merger. Each DDI stockholder who
otherwise would have been entitled to a fraction of a share of MedQuist Common
Stock will receive in lieu thereof cash in accordance with the terms of the
Merger. MedQuist has caused the shares of MedQuist Common Stock issuable
pursuant to the Merger Agreement to be listed on the Nasdaq National Market. See
"The Merger--Terms of the Merger."
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<PAGE>
A letter of transmittal from American Stock Transfer & Trust Co. (the
"Exchange Agent") (including instructions setting forth the procedures for
exchanging such holder's certificates representing DDI Common Stock
("Certificates") for the Merger Consideration payable to such holder pursuant to
the Merger) has accompanied this Prospectus sent to each holder of record, as of
June 26, 1998, of shares of DDI Common Stock. Upon surrender to the Exchange
Agent of such Certificates, together with a duly completed and executed letter
of transmittal, such holder will promptly receive the Merger Consideration for
each share of DDI Common Stock previously represented by the Certificates so
surrendered. See "The Merger--Terms of the Merger."
Treatment of DDI Stock Options
At the Effective Time, each outstanding unexpired option to purchase shares
of DDI Common Stock (a "DDI Stock Option") which was granted pursuant to DDI's
1996 Non-Qualified Stock Option Plan, as amended (the "DDI Stock Option Plan"),
will be canceled and extinguished and will be converted into an option to
purchase that number of shares of MedQuist Common Stock ("MedQuist Stock
Options") that is equal to the number of shares of DDI Common Stock to which
such option relates times the Exchange Ratio. A total of 1,223,012 DDI Stock
Options with an average exercise price of $0.96 will be exchanged for
approximately 176,224 MedQuist Stock Options, with an average exercise price of
$6.665 per share. See "The Merger--Terms of the Merger."
Surviving Representations and Warranties; Escrowed Shares
In the Merger Agreement, DDI and the Principal Shareholders made certain
representations and warranties to MedQuist and TL regarding, among other things,
the business, assets and liabilities of DDI. Certain of the representations and
warranties of DDI and the Principal Shareholders, however, did not expire at
that time, most of which relate to the financial condition of DDI prior to the
Merger. These representations and warranties shall survive until the earlier of
(i) the completion of the first independent audit of the consolidated financial
statements of MedQuist in which the surviving corporation's financial statements
are included, or (ii) one (1) year from the date of the Merger Agreement (the
"Survival Period").
Under the Merger Agreement, ten percent of the shares of MedQuist Common
Stock (91,141 shares) received in the Merger by the DDI stockholders, including
the Principal Shareholders, are to be held in escrow by Crestar Bank (the
"Escrow Agent") to cover any damages incurred by MedQuist and TL as a result of
the breach of any surviving representations and warranties. After the expiration
of the Survival Period, any shares of MedQuist Common Stock then held by the
Escrow Agent shall be delivered to the DDI stockholders. See "The Merger--Terms
of the Merger."
Certain Consequences of the Merger
Upon issuance of the shares of MedQuist Common Stock pursuant to the
Merger, holders of DDI Common Stock will become shareholders of MedQuist, and
each share of DDI Common Stock issued and outstanding immediately prior to the
Merger will be converted into the right to receive the Merger Consideration. In
addition, holders of DDI Stock Options will be entitled to receive MedQuist
Stock Options and upon the exercise of their MedQuist Stock Options, a number of
shares of MedQuist Common Stock determined as described under "The Merger--Terms
of the Merger."
After the issuance of the shares of MedQuist Common Stock issuable pursuant
to the Merger, the MedQuist shareholders immediately prior to the execution of
the Merger Agreement will own approximately 96.07% of the outstanding shares of
MedQuist Common Stock, the Principal Shareholders will own approximately 3.71%
of the outstanding shares of MedQuist Common Stock, and the remaining DDI
stockholders will own approximately 0.22% of the outstanding shares of MedQuist
Common Stock. See "The Merger--Certain Consequences of the Merger."
Regulatory Approvals
No federal or state regulatory approval was required in connection with the
Merger.
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Conduct of the Business of MedQuist and TL after the Merger
The members of the respective boards of directors of MedQuist and TL and
the officers of each of MedQuist and TL immediately prior to the consummation of
the Merger are continuing as the directors and officers of MedQuist and TL,
respectively, following the Merger. See "Management of MedQuist and TL Upon
Consummation of the Merger."
Interests of Certain Persons in the Merger
David A. Cohen, Chairman of the Board and Chief Executive Officer of DDI
since May 28, 1998, is also a Chairman of the Board and the Chief Executive
Officer of MedQuist. John A. Donohoe, John R. Emery and John M. Suender,
executive officers of MedQuist, have been executive officers of DDI since May
28, 1998.
Richard D. Cameron, the former Chairman of the Board and Chief Executive
Officer of DDI and one of the Principal Shareholders, held approximately 46.4%
of the outstanding shares of DDI Common Stock prior to the execution of the
Merger Agreement. Mr. Cameron has entered into a one year employment agreement
with TL pursuant to which he will earn a base salary of $100,000.
McGettigan, Wick & Co., Inc. ("McGettigan, Wick") served as DDI's financial
advisors, and received a fee of $200,000 for their role in advising DDI in
connection the Merger. Charles C. McGettigan and Myron A. Wick III, two of the
principals of McGettigan, Wick, were members of the DDI Board that approved the
Merger. In addition, McGettigan, Wick and Messrs. McGettigan and Wick are
affiliates of Proactive, Lagunitas and G&M, three of the Principal Shareholders
which together held approximately 47% of the outstanding shares of DDI Common
Stock prior to the execution of the Merger Agreement.
Appraisal Rights
Holders of DDI Common Stock are entitled to appraisal rights under the
Delaware General Corporation Law (the "DGCL"). Any stockholder entitled to
appraisal rights may, after July 2, 1998 and on or prior to July 22, 1998,
demand from TL the appraisal of any or all of his or her shares of DDI Common
Stock by delivering a written demand for an appraisal to the Corporate
Secretary, Transcriptions, Ltd., stating the identity of the stockholder and
that the stockholder intends by such notice to demand the appraisal of all of
his or her shares. Demand is necessary if the stockholder is to perfect his or
her appraisal rights. See "The Merger--Appraisal Rights" and "Annex A--Section
262 of the Delaware General Corporation Law (relating to statutory appraisal
rights)." Holders of DDI Common Stock who wish to exercise their appraisal
rights should not complete the accompanying letter of transmittal.
Certain Federal Income Tax Consequences
The Merger is expected to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
Assuming the Merger qualifies as a reorganization within the meaning of Section
368(a) of the Code, no gain or loss will be recognized by DDI stockholders upon
their exchange of DDI Common Stock for MedQuist Common Stock, except that any
DDI stockholder who receives cash proceeds in lieu of a fractional share
interest in MedQuist Common Stock will recognize gain or loss equal to the
difference between such cash proceeds and the tax basis in the fractional share
interest, and such gain or loss will constitute capital gain or loss if such
stockholder's DDI Common Stock was held as a capital asset at the Effective
Time. A DDI stockholder who perfects appraisal rights with respect to his or her
shares of DDI Common Stock should, in general, treat the difference between the
tax basis of the shares of DDI Common Stock held by such person with respect to
which such appraisal rights are perfected and the amount received in payment
therefor as capital gain or loss. However, depending on the DDI stockholder's
particular circumstances, such amount might be treated for federal income tax
purposes as dividend income. See "The Merger--Certain Federal Income Tax
Consequences."
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Accounting Treatment
The Merger has been accounted for as a "pooling of interests" transaction,
as such term is used under Generally Accepted Accounting Principles ("GAAP").
See "The Merger-- Accounting Treatment."
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Registration Rights
Pursuant to the terms of the Merger Agreement, MedQuist is required to
prepare and file with the Commission a Registration Statement on Form S-3 for
the purpose of registering for resale the shares of MedQuist Common Stock issued
to the Principal Shareholders pursuant to the Merger Agreement.
Comparison of Shareholder's Rights
Pursuant to the Merger and upon surrender of their Certificates, the
holders of DDI Common Stock at the Effective Time will become shareholders of
MedQuist. See "Comparison of Shareholders' Rights" for a summary of the material
differences between the rights of holders of MedQuist Common Stock and DDI
Common Stock. These differences arise from the distinctions between the laws of
the jurisdictions in which MedQuist is, and DDI was, incorporated (New Jersey
and Delaware, respectively) and the distinctions between the respective charters
and bylaws of MedQuist and DDI prior to the Merger.
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SELECTED HISTORICAL FINANCIAL DATA OF MEDQUIST
(In thousands, except per share data)
The following selected consolidated financial data of MedQuist for the
years ended December 31, 1997, 1996, 1995, 1994 and 1993 are derived from
consolidated financial statements of MedQuist which have been audited by Arthur
Andersen LLP, independent public accountants. Such data is qualified in its
entirety by reference to historical financial information set forth in
MedQuist's Annual Report on Form 10-K for the year ended December 31, 1997.
References in the notes to this table to Notes to Consolidated Financial
Statements are to the notes to consolidated financial statements included in
such Form 10-K. The selected consolidated financial data as of and for the three
months ended March 31, 1998 and 1997 are derived from unaudited consolidated
financial statements and is qualified in its entirety by reference to historical
financial information set forth in MedQuist's Quarterly Report on Form 10-Q/A
for the period ended March 31, 1998. Operating results for the three months
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1998.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
-------------------- ------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operation Data (1):
Revenues $ 27,396 $ 18,621 $ 84,590 $ 61,480 $ 45,127 $ 24,841 $ --
Costs and expenses:
Cost of revenues 20,211 13,714 62,282 45,591 33,711 18,677 --
Selling, general and administrative 1,357 1,059 4,620 3,579 4,325 2,798 1,688
-------- -------- -------- -------- -------- -------- --------
Depreciation 1,075 754 3,568 2,468 1,862 639 60
-------- -------- -------- -------- -------- -------- --------
Amortization 440 350 1,517 1,176 496 264 12
-------- -------- -------- -------- -------- -------- --------
Total operating expenses 23,083 15,877 71,987 52,814 40,394 22,378 1,760
-------- -------- -------- -------- -------- -------- --------
Operating income (loss) 4,313 2,744 12,603 8,666 4,733 2,463 (1,760)
Interest expense 14 63 173 1,649 3,695 2,738 1,426
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes 4,299 2,681 12,430 7,017 1,038 (275) (3,186)
Income tax provision (benefit) 1,655 1,046 4,799 2,833 431 (109) (1,290)
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing operations 2,644 1,635 7,631 4,184 607 (166) (1,896)
Discontinued operations (2) -- -- -- -- (1,729) 1,612 3,746
Extraordinary item (3)
-- -- -- -- (545) -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) 2,644 1,635 7,631 4,184 (1,667) 1,446 1,850
Inducement deduction (4) -- -- -- (707) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) available to common
shareholders $ 2,644 $ 1,635 $ 7,631 $ 3,477 $ (1,667) $ 1,446 $ 1,850
======== ======== ======== ======== ======== ======== ========
Basic income per common share:
Continuing operations (1) $ 0.12 $ 0.08 $ 0.36 $ 0.26 $ 0.09 $ (0.03) $ (0.22)
Discontinued operations (2) -- -- -- -- (0.25) 0.24 0.44
Extraordinary item (3) -- -- -- -- (0.08) -- --
Inducement deduction (4) -- -- -- (0.05) -- -- --
-------- -------- -------- -------- -------- -------- --------
$ 0.12 $ 0.08 $ 0.36 $ 0.21 $ (0.24) $ 0.21 $ 0.22
======== ======== ======== ======== ======== ======== ========
Diluted income per common share:
Continuing operations (1) $ 0.12 $ 0.07 $ 0.34 $ 0.23 $ 0.08 $ (0.03) $ (0.22)
Discontinued operations (2) -- -- -- -- (0.23) 0.24 0.44
Extraordinary item (3) -- -- -- -- (0.08) -- --
Inducement deduction (4) -- -- -- (0.04) -- -- --
-------- -------- -------- -------- -------- -------- --------
$ 0.12 $ 0.07 $ 0.34 $ 0.19 $ (0.23) $ 0.21 $ 0.22
======== ======== ======== ======== ======== ======== ========
Balance Sheet Data:
Working capital $ 25,476 $ 19,667 $ 22,723 $ 18,355 $ 4,926 $ 776 $ 1,108
Total assets 92,919 76,569 90,805 74,341 58,095 51,403 25,041
Long-term debt, net of current portion 52 1,625 1,404 1,719 15,956 30,415 12,395
Shareholders' equity 81,323 66,994 76,317 65,695 10,420 10,692 9,071
</TABLE>
(1) Transcriptions, Ltd. was acquired by the Company effective May 1, 1994. All
prior businesses have been treated as discontinued operations. See Note (2)
below.
(2) On November 14, 1995, MedQuist executed a letter of intent to sell its
receivables management business. The operations and net assets of its
receivables management business and previously divested businesses have
been accounted for as discontinued operations. Discontinued operations are
presented net of tax and include a gain on disposal of $1,749 in 1993 and a
loss on disposal of $3,180 in 1995. See Note 3 of Notes to Consolidated
Financial Statements of MedQuist.
(3) Represents the loss on early extinguishment of debt, net of income taxes.
(4) Represents issuance of 128 shares of common stock to induce a warrant
holder to exercise. MedQuist has recorded a $707 non-recurring deduction
from net income available to common shareholders. See Note 8 of Notes to
Consolidated Financial Statements of MedQuist.
13
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF DDI
(In thousands, except per share data)
The following selected financial data of DDI as of and for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993 are derived from financial
statements of DDI which have been audited by Hozik & Charin, independent
accountants. Such data is qualified in its entirety by reference to historical
financial information set forth in DDI's Annual Report on Form 10-KSB for the
year ended December 31, 1997. The selected financial data as of and for the
three months ended March 31, 1998 and 1997 are derived from unaudited financial
statements and is qualified in its entirety by reference to historical financial
information set forth in DDI's Quarterly Report on Form 10-QSB for the period
ended March 31, 1998. Operating results for the three months ended March 31,
1998 are not necessarily indicative of the results that may be achieved for the
entire year ending December 31, 1998.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------ ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
Statement of Operation Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 2,997 $ 1,994 $10,026 $ 6,937 $ 5,058 $ 3,838 $ 2,746
Costs and expenses:
Cost of revenues 1,961 1,275 6,398 4,490 3,443 2,557 1,854
Selling, general and administrative 716 524 2,598 1,717 1,284 947 777
------- ------- ------- ------- ------- ------- -------
Total operating expenses 2,677 1,799 8,996 6,207 4,727 3,504 2,631
------- ------- ------- ------- ------- ------- -------
Operating income 320 195 1,030 730 331 334 115
Interest expense
-- 4 21 37 25 28 31
------- ------- ------- ------- ------- ------- -------
Income before income taxes 320 191 1,009 693 306 306 84
Income tax provision
123 72 393 253 202 112 31
------- ------- ------- ------- ------- ------- -------
Net income $ 197 $ 119 $ 616 $ 440 $ 104 $ 194 $ 53
======= ======= ======= ======= ======= ======= =======
Net income per common share:
Basic $ 0.03 $ 0.02 $ 0.10 $ 0.07 $ 0.02 $ 0.03 $ 0.01
======= ======= ======= ======= ======= ======= =======
Diluted $ 0.03 $ 0.02 $ 0.09 $ 0.07 $ 0.02 $ 0.03 $ 0.01
======= ======= ======= ======= ======= ======= =======
Balance Sheet Data:
Working capital (deficit) $ 386 $ 287 $ 495 $ 265 $ (138) $ 345 $ 176
Total assets 3,571 2,283 3,289 2,157 1,640 1,228 979
Long-term debt, net of current portion -- 22 1 31 57 99 215
Shareholders' equity 1,959 1,164 1,700 1,044 605 829 503
</TABLE>
14
<PAGE>
SELECTED UNAUDITED PROFORMA COMBINED FINANCIAL DATA
(In thousands, except per share data)
The following table sets forth certain selected pro forma combined financial
data for MedQuist. and DDI. The pro forma amounts included in the table below
assume the consummation of the Merger and are based on the "pooling of
interests" method of accounting. The following table should be read in
conjunction with the historical financial statements of MedQuist and DDI and the
pro forma financial data included herein under the caption "Unaudited Pro Forma
Combined Financial Information."
The pro forma amounts below are presented for informational purposes only and
are not necessarily indicative of the results of operations of the combined
company that would have actually occurred had the Merger been consummated as of
January 1, 1995 or of the financial condition of the combined company had the
Merger been consummated as of March 31, 1998 or of the future results of
operations or financial condition of the combined company. The pro forma
information does not reflect any synergies anticipated as a result of the
Merger, in particular the elimination of costs associated with Digital
Dictation, Inc.'s status as a public company and other administrative savings.
There can be no assurances that such synergies will be realized. In addition,
the pro forma statement of operations data does not reflect transaction costs
related to the Merger.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
---------------------- -------------------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
Statement of Operation Data:
<S> <C> <C> <C> <C> <C>
Revenues $30,393 $20,615 $94,616 $68,417 $50,185
Costs and expenses:
Cost of revenues 22,762 15,439 70,906 51,516 38,190
Selling, general and administrative 1,357 1,059 4,620 3,579 4,325
Depreciation 1,201 828 3,940 2,750 2,110
Amortization 440 350 1,517 1,176 496
------- ------- ------- ------- -------
Total operating expenses
25,760 17,676 80,983 59,021 45,121
------- ------- ------- ------- -------
Operating income 4,633 2,939 13,633 9,396 5,064
Interest expense
14 67 194 1,686 3,720
------- ------- ------- ------- -------
Income from continuing operations before
income taxes 4,619 2,872 13,439 7,710 1,344
Income tax provision
1,778 1,118 5,192 3,086 633
------- ------- ------- ------- -------
Income from continuing operations $ 2,841 $ 1,754 $ 8,247 $ 4,624 $ 711
======= ======= ======= ======= =======
Income per share from continuing operations:
Basic $ 0.13 $ 0.08 $ 0.38 $ 0.27 $ 0.09
Diluted 0.12 0.08 0.35 0.24 0.08
Weighted average shares outstanding:
Basic 22,648 21,582 21,908 17,016 7,872
Diluted 23,956 23,164 23,540 18,920 8,424
Balance Sheet Data (March 31, 1998):
Working capital $25,112 -- -- -- --
Total assets 96,490 -- -- -- --
Long-term debt, net of current portion 52 -- -- -- --
Shareholders' equity 82,532 -- -- -- --
</TABLE>
15
<PAGE>
COMPARATIVE PER SHARE DATA
(Unaudited)
The following table presents historical and pro forma per share data for
MedQuist and historical and equivalent pro forma per share data for DDI.
Equivalent pro forma per share amounts for DDI were calculated by multiplying
the relevant MedQuist pro forma amount by 0.1440899, the "Exchange Ratio." The
following tables should be read in conjunction with the historical financial
statements of MedQuist and DDI and the pro forma financial data included herein
under the caption "Unaudited Pro Forma Combined Financial Information."
<TABLE>
<CAPTION>
Three
Months Year Ended
Ended December 31,
March 31, ----------------------
1998 1997 1996 1995
---- ---- ---- ----
MEDQUIST
Income from continuing operations:
<S> <C> <C> <C> <C>
Historical - Basic $0.12 0.37 0.26 0.09
Historical - Diluted 0.12 0.34 0.24 0.08
Pro Forma - Basic 0.13 0.38 0.27 0.09
Pro Forma-Diluted 0.12 0.35 0.25 0.09
Dividends:
Historical -- -- -- --
Book value:
Historical (1) 3.70 3.56
Pro forma (2) 3.64 3.51
DDI
Net income:
Historical - Basic 0.03 0.10 0.07 0.02
Historical - Diluted 0.03 0.09 0.07 0.02
Equivalent Pro Forma - Basic (3) 0.02 0.05 0.04 0.01
Equivalent Pro Forma - Diluted (3) 0.02 0.05 0.04 0.01
Dividends:
Historical -- -- -- --
Book value:
Historical (1) 0.31 0.27
Equivalent Pro Forma (4) 0.52 0.50
</TABLE>
(1) Computed by dividing shareholders' equity by the number of shares of common
stock outstanding at the end of the period.
(2) Computed by dividing pro forma shareholders' equity by the pro forma number
of shares of common stock outstanding at the end of the period.
(3) Computed by multiplying the relevant pro forma net income amount by the
Exchange Ratio of 0.1440899.
(4) Computed by multiplying the pro forma book value by the Exchange Ratio of
0.1440899.
16
<PAGE>
MARKET PRICE INFORMATION
Since May 24, 1996, MedQuist Common Stock has been traded on the Nasdaq
National Market under the symbol "MEDQ." From September 20, 1994 until May 24,
1996, MedQuist Common Stock was traded on the American Stock Exchange under the
symbol "MBS." The following table sets forth, for the last two fiscal years and
for the first quarter of 1998 through the date set forth below, the high and low
reported closing sale prices for MedQuist Common Stock for the period during
which MedQuist Common Stock has been traded on the American Stock Exchange and
the range of high and low bid quotations for the period in which the Common
Stock was quoted in the Nasdaq National Market. The bid quotations for the
Nasdaq National Market reflect inter-dealer prices, do not include retail
mark-ups, mark-downs or commissions and may not necessarily reflect actual
transactions. DDI Common Stock is traded on the Nasdaq Bulletin Board under the
symbol "DGDT." The following table sets forth, for the last two fiscal years and
for the first quarter of 1998 through the date set forth below, the high and low
reported closing sale prices for DDI Common Stock.
MEDQUIST DDI
COMMON STOCK COMMON STOCK(a)
------------- ----------------
HIGH LOW HIGH LOW
---- --- ---- ---
1996
First Quarter................... $ 4.34 2.79 (b) (b)
Second Quarter.................. 6.92 4.04 (b) (b)
Third Quarter................... 7.42 4.17 1.75 0.94
Fourth Quarter.................. 8.34 5.50 0.75 0.25
1997
First Quarter................... 8.84 7.25 0.88 0.38
Second Quarter.................. 10.13 6.34 2.94 0.50
Third Quarter................... 11.69 9.88 3.25 1.50
Fourth Quarter.................. 17.38 11.00 3.00 1.38
1998
First Quarter................... 19.44 15.15 1.88 1.50
(a) The above noted bid quotations of MedQuist Common Stock reflect a three
for two stock split effected on September 9, 1997 and a two-for-one stock split
effected on June 15, 1998.
(b) No publicly available share prices prior to July 24, 1996.
The information set forth in the table below presents: (i) the closing
price for shares of MedQuist Common Stock and DDI Common Stock on May 28, 1998,
the last day on which trading occurred prior to the public announcement of the
intention to complete the Merger, and on June 26, 1998, the last full trading
day for which information was available prior to the date of this Prospectus and
(ii) the Equivalent Per Share Price (as hereinafter defined) of DDI Common Stock
on May 28, 1998 and June 26, 1998. The "Equivalent Per Share Price" of DDI
Common Stock represents the closing price per share of MedQuist Common Stock
reported on Nasdaq National Market,
17
<PAGE>
multiplied by $0.1440899. The Equivalent Per Share Price is not the same as
the Merger Consideration. See "The Merger--Terms of the Merger."
DDI
COMMON STOCK
MEDQUIST DDI EQUIVALENT
COMMON COMMON PER SHARE
PER SHARE PRICE STOCK STOCK PRICE
- --------------------------------------------------------------------------------
May 28, 1998 $21.875(1) $2.875 $3.152
June 26, 1998 $27.9375 $2.875 $3.152
(1) Adjusted to reflect a two for one stock split effected on June 15,
1998.
MedQuist has caused the listing on the Nasdaq National Market of the shares
of MedQuist Common Stock issuable in connection with the Merger. See "The
Merger--Nasdaq Listing."
DDI STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE
MEDQUIST COMMON STOCK. NO ASSURANCE CAN BE GIVEN AS TO THE FUTURE PRICES OF, OR
MARKETS FOR, MEDQUIST COMMON STOCK.
DIVIDEND POLICIES
To date, MedQuist has not paid any dividends on its capital stock. MedQuist
currently intends to retain any future earnings to fund operations and the
continued development of its business and, therefore, does not anticipate paying
any cash dividends on MedQuist Common Stock in the foreseeable future. Future
cash dividends, if any, will be determined by the Board of Directors of
MedQuist, and will be based upon MedQuist's earnings, capital requirements,
financial condition and other factors deemed relevant by the Board of Directors.
MedQuist's senior lender restricts the payment of any dividends.
DDI has not paid any dividends since becoming a public company in 1995.
18
<PAGE>
INFORMATION CONCERNING MEDQUIST
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
2,800 trained transcriptionists, MedQuist converts free-form medical dictation
into electronically formatted patient records which healthcare 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 1987 as a group of out-patient
healthcare businesses affiliated with a non-profit healthcare provider. By the
end of 1995, MedQuist had divested all of its non-medical transcription
businesses. Since the acquisition of TL in 1994, MedQuist has acquired 15
smaller medical transcription companies.
Industry Overview
Electronic medical transcription and document management is the process by
which free-form dictated patient data is captured in a useable format, routed to
the appropriate location and inserted into a patient's medical record.
Physicians and other individual healthcare providers use this information for
direct patient care delivery purposes and administrative personnel use the
information for billing and other administrative purposes. Historically, the
majority of dictated reports and related transcription expenditures were
generated by hospital medical record departments, where transcription services
represent a significant expenditure. Examples of these reports include patient
histories, discharge summaries, operative reports and consults. Increasingly,
other hospital departments, such as radiology, emergency, oncology, pediatrics
and cardiology, are dictating reports to improve their delivery of care and
administrative functions. Health maintenance organizations, out-patient clinics
and physician practice groups are also expanding their use of transcribed
medical reports. Accordingly, MedQuist believes the market for outsourced
transcription services will expand due in part to the following emerging trends.
Increased Outsourcing. In the 1990's outsourcing of services in the
healthcare industry is increasing as a means to reduce administrative burdens
and fixed costs. Hospitals and other healthcare organizations are increasingly
outsourcing their electronic transcription of dictated patient records as their
information needs and volume of dictated reports expand. As healthcare providers
continue to consolidate and grow in size and the delivery of medical care
becomes decentralized, their information needs become more complex. Outsourcing
of transcription services permits providers to reduce overhead and costs, ease
administrative burdens, improve quality of reports, access leading technologies
without development and investment risk and obtain the expertise to implement
and manage a system tailored to their specific requirements.
Growth in Information Systems. As healthcare organizations expand and the
delivery of care becomes increasingly decentralized, the insurance industry and,
in some cases, healthcare accreditation organizations and governmental agencies
are requiring expanded use of transcribed reports to facilitate communication
between various parts of a healthcare network, to improve the quality and
efficiency of patient care, to retain and provide reliable information in the
event of malpractice litigation and to support the requirements for
reimbursement under Medicare and Medicaid. Moreover, the growing information
needs of hospitals and other healthcare organizations are driving the creation
of electronic medical record systems as the first step in the implementation of
the computer based patient record and the ability to perform outcomes analysis.
MedQuist believes that electronic medical transcription services are a core
component of such systems and records since they provide the ability to capture,
access and manipulate the patient data which forms the basis of the patient
record.
Delivery of Care. As the health insurance industry continues to shift from
traditional fee-for-service reimbursement to managed care forms of reimbursement
19
<PAGE>
such as "capitation," healthcare providers and payors are creating integrated
healthcare delivery systems consisting of hospitals, health maintenance
organizations, out-patient clinics and physician practice groups which must
coordinate the exchange of patient information and the delivery of patient care.
The accurate and efficient capture of patient data, and the distribution and
storage of and access to patient medical records are critical to such
coordination. Similar coordination is required as healthcare organizations,
often with different information systems, consolidate and increase in size
through mergers and acquisitions. Increasingly, healthcare organizations are
recognizing that centralizing patient data into an accessible system can create
economies of scale to reduce overall healthcare costs and improve the efficient
delivery of patient care.
Strategy
MedQuist's objectives are to maintain its leadership position as a provider
of electronic transcription and information management solutions to the
healthcare industry and to enhance that position as the information needs of
healthcare providers continue to expand and evolve. The key elements of
MedQuist's strategy include the following:
Expand Existing Client Relationships. A majority of MedQuist's
transcription services are provided to hospital medical record departments.
Through its close and continuing client relationships, MedQuist seeks to
increase its services as these departments outsource more of their transcription
requirements and as the volume of patient records continue to grow. In addition,
MedQuist is seeking to penetrate the direct care departments at hospitals such
as radiology, emergency, oncology, pathology, pediatrics and cardiology, within
its existing client base. Historically, these departments have not dictated
their patient data or outsourced the transcription of their patient data to the
same extent as medical record departments.
Extend Current Client Base. MedQuist is seeking to extend its base of
traditional hospital clients and to pursue new clients such as health
maintenance organizations, out-patient clinics and physician practice groups
which MedQuist believes will represent a growing percentage of the available
market. Based upon input from new clients, MedQuist believes that references
from its existing client base represent a key component of its sales and
marketing efforts.
Leverage Technology Leadership. MedQuist's proprietary software, which
operates within an open architecture environment, and MedQuist's technological
expertise enable it to create customized systems tailored to specific client
requirements and changing industry standards. MedQuist intends to continue to
incorporate advances in technology to improve the efficiency of its operations,
reduce costs, expand the breadth and functionality of its services and enhance
its competitive position.
Capitalize on Emerging Technologies. MedQuist is initiating relationships
with developers and end-users of emerging technologies, such as
voice-recognition, data mining and outcomes analysis and Internet based
telecommunications to create value added services for its clients and to
participate in the development of the computer based patient record. During
1997, MedQuist formed a strategic alliance with Lernout & Hauspie Speech
Products to develop and market a clinical workstation which integrates voice
recognition, structured input and free-form dictation. Also during 1997,
MedQuist and Synthesys Technologies, Inc. executed a co-marketing agreement to
market Synthesys' data mining and outcomes analysis software to MedQuist's
customer base.
Pursue Strategic Acquisitions. MedQuist intends to pursue acquisitions of
other transcription companies which expand its client base, management team,
network of qualified transcriptionists or geographic presence, as well as
acquisitions, joint ventures and other relationships which expand its
technological expertise. As the largest publicly traded company engaged
primarily in providing medical transcription services, MedQuist believes that it
can capitalize on consolidation opportunities within the fragmented medical
transcription industry. Since acquiring TL in 1994, MedQuist has acquired 15
smaller medical transcription companies.
20
<PAGE>
The MedQuist Integrated System
MedQuist integrates proprietary software with sophisticated digital
dictation equipment, a healthcare provider's host system, a network of more than
2,800 transcriptionists and an experienced management team to provide customized
solutions for hospitals and other healthcare providers. Through its outsourced
transcription and data management services, MedQuist captures and stores
free-form medical dictation, professionally transcribes such dictation into
accurate reports, and electronically receives, reviews and distributes final
reports to a client by up-loading them into the client's computer system for
placement into a patient's medical record. Authorized individuals at multiple
locations can access this electronic information when needed for administrative,
billing and patient care purposes. MedQuist believes that the transcription and
management of free-form dictation are key components in the increasing
implementation of electronic medical record systems.
The following are the key characteristics of MedQuist's electronic
transcription and document management system:
Customization/Open-Architecture. MTS operates in an open architecture
environment providing flexibility to address individual client needs. MedQuist
is capable of modifying MTS to interface with existing or legacy systems.
MedQuist's technical staff works closely with its clients, both before and after
installation, to develop system modifications and refinements. For example, MTS
allows database abstracting and can generate reports which clients can use for
administrative, management or direct delivery of patient care purposes (i.e.,
outcomes analysis studies).
Fast, Accurate and Reliable Reports. MedQuist believes that due to its
large number (more than 2,800) of trained transcriptionists and its ability to
allocate work among them efficiently, it is able to reduce the production
turnaround times for transcribed medical reports. MTS allows a match of client
turnaround requirements and transcriptionist availability that an in-house staff
or smaller organization generally cannot provide. MTS also provides editing and
electronic review capabilities, such as specific reference to pages or clauses
to alert clients to potential deficiencies, that increase accuracy and
reliability. The quality of its transcriptionists and the capabilities of MTS
enable MedQuist to deliver its services on a cost-effective basis.
Distribution/Routing System. MTS speeds the distribution of transcribed
reports within the client's healthcare organization. MTS enables MedQuist to
exchange patient data with the client, using either the HL-7 format or another
interface protocol selected by the client. As a result, completed reports are
uploaded directly into the client's computer system. Once received at the client
host computer, authorized healthcare professionals throughout the client's
organization can access the report.
Tracking System. DTS enables a client and individual healthcare providers
to review the status of particular patient data and transcribed reports at any
point in time and to advise MedQuist whether the production of a particular
report requires acceleration. Through DTS, the client and MedQuist are able to
monitor MedQuist's on-time performance, especially with respect to critical
reports requiring turnaround times of less than 24 hours. Healthcare providers
also use DTS as an integral management tool to monitor physician timeliness in
their dictation, review and sign-off process.
Technology Development
MedQuist continually evaluates emerging technologies and applies them as
appropriate to make its services more reliable, efficient and cost-effective,
and to assist its clients in meeting their transcription and document management
needs. MedQuist modifies MTS to interface with existing or legacy systems.
MedQuist works directly with its clients, both before and after implementation
of its systems, to create customized solutions. For example, MedQuist partners
with its clients to customize MTS to enable electronic data exchange in
accordance with the HL-7 format, or other interface protocols, to link the
various components of the client's healthcare network.
21
<PAGE>
MedQuist has also made technological enhancements to MTS to increase the
speed and accuracy of its transcriptionists. Completed projects include the
development of keys and keystroke combinations which translate into commonly
used, often misspelled, medical and technical terms. Additional improvements in
the MTS online spellcheck and editing systems are currently under development,
as are enhancements to MedQuist's electronic signature capability, MedQuist's
use of facsimile servers to facilitate the distribution of transcribed reports
to multiple locations, and the conversion of ASCII text into HTML documents for
transmission over computer networks. During 1997, MedQuist formed a strategic
alliance with Lernout & Hauspie Speech Products to develop and market a clinical
workstation which integrates voice recognition, structured input and free-form
dictation. Also during 1997, MedQuist and Synthesys Technologies, Inc. executed
a co-marketing agreement to market Synthesys' data mining and outcomes analysis
software to MedQuist's customer base.
Clients
MedQuist's diversified client base includes more than 800 hospitals and
other healthcare organizations and physician practice groups. A majority of
MedQuist's largest clients are hospitals, including large metropolitan hospitals
and major teaching hospitals. Additional clients include health maintenance
organizations and out-patient clinics. MedQuist's clients are located in 42
states and the District of Columbia. The following table sets forth certain
information relating to MedQuist's client profile and their contribution to
MedQuist's revenue for 1997 and 1996:
Percentage of Revenues
Type of Client 1997 1996
- -------------- ---- ----
Hospital Medical Records Departments............ 68.0% 69.7%
Other Hospital Departments...................... 21.8% 20.9%
HMOs, Out-Patient Clinics and Other
Healthcare Providers........................... 8.4% 8.5%
Physician Practice Groups....................... 1.8% 0.9%
Sales and Marketing
All office managers and operational vice presidents, as well as MedQuist's
senior management, including the Chief Executive Officer, have sales
responsibilities. Based on input from new clients, MedQuist believes that,
historically, new clients have utilized its services in large part due to
recommendations and references by its existing national client base, and that
references from its existing client base will continue to be a key component of
its marketing and sales strategy. In addition to its traditional transcription
services to hospital medical record departments, MedQuist's target markets
include patient care departments, such as radiology, emergency rooms, oncology,
pathology, pediatrics and cardiology, health maintenance organizations,
physician practice groups and out-patient clinics.
When performing sales and marketing responsibilities, MedQuist's employees
utilize a consultative sales and marketing approach by establishing a working
relationship with its clients through a series of direct meetings with the chief
financial officer, health information manager, chief information officer and
other key individuals at the client's organization. In this manner, MedQuist
obtains information concerning the particular needs of a client and educates the
client as to how MedQuist's services can be customized to meet those needs. As
part of its marketing efforts, MedQuist also advertises in national healthcare
trade publications (including those sponsored by the American Health Information
Management Association), and participates in industry conventions.
Competition
MedQuist currently competes in a highly fragmented industry which is
predominately populated by small, regional or local companies, with a limited
number of national companies. According to the Medical Transcription Industry
Alliance, there are over 1,500 companies providing medical transcription
services in the United States.
22
<PAGE>
MedQuist believes that it competes for clients on the basis of price,
ability to customize services and the reliability, accuracy and turnaround time
of transcribed reports. In addition to outside transcription services, MedQuist
competes with in-house transcription departments maintained by many healthcare
organizations.
Employees
As of March 1, 1998, MedQuist employed 857 persons, of whom 42 are
administrative, 29 are branch office managers, 59 are technical support, 366 are
clerical and other support personnel, and 361 are transcriptionists. In
addition, 2,517 persons provide transcription services to MedQuist from their
homes. MedQuist compensates its transcriptionists under a production
incentive-based compensation structure based upon their performance (including
accuracy, speed and output). MedQuist believes that its ability to engage
at-home transcriptionists enables it to compete effectively for the limited
number of skilled transcriptionists. By being able to work out of their homes,
qualified transcriptionists can make their own hours, eliminate commuting costs
and time and have the benefits of flexible work hours.
MedQuist treats its at-home transcriptionists as independent contractors
for state tax, benefits and unemployment purposes and statutory employees for
social security and federal income tax purposes. A successful challenge to
MedQuist's position or a change in applicable law could result in the incurrence
of liability for withholding taxes, disability payments, unemployment payments,
interest and penalties by MedQuist.
MedQuist utilizes a quality control program for training its
transcriptionists to permit greater accuracy of transcribed reports. MedQuist
has hired a national recruiter for screening and testing applicants for
positions as transcriptionists and maintains relationships with transcriptionist
schools to develop applicant pools. Screening procedures include testing
applicants' skills to determine whether they meet MedQuist's standards.
None of MedQuist's employees are represented by a labor union. MedQuist
considers its relations with its employees and at-home transcriptionists to be
good.
Government Regulation
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the outsourcing arrangements of healthcare
providers. Federal and state legislators have proposed programs to reform the
United States healthcare system and other proposals are in the development
stage. In general, these programs and proposals tend to emphasize managed care,
seek to lower reimbursement rates and otherwise attempt to control the
environment in which providers operate.
In providing its services, MedQuist is subject to certain 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.
Federal and state regulators are making increasing efforts to investigate
claims of false billing for government reimbursement and have secured
substantial payments from healthcare providers to resolve these claims. Because
these claims often result from a lack of appropriate documentation to support
billing, these government investigational efforts may stimulate a need for more
comprehensive transcription services. Additionally, healthcare accreditation
organizations and governmental authorities have begun to require more efficient
transcription of patient medical records as part of the requirements for a
hospital or other healthcare organization to receive and maintain its
accreditation.
It presently cannot be determined if any additional healthcare legislation
or self-regulatory proposals (whether relating to reimbursement, accreditation,
billing practices, confidentiality, the healthcare industry in general or
otherwise) will be introduced, the form that any such legislation or proposals
would take, whether such legislation or proposals would be enacted or adopted
and, if enacted or adopted, what effect, if any, such legislation or proposals
would have on the healthcare industry in general and MedQuist in particular.
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Intellectual Property
MedQuist considers its MTS and DTS trademarks and its corporate names
MedQuist and Transcriptions, Ltd. to be important to the operation of its
business and the marketing of its services. MedQuist has been issued a
registered trademark for the corporate names "MedQuist" and "Transcriptions,
Ltd." No registered trademark has been issued for MTS or DTS. 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 relies on
existing trade secrets and copyright laws to afford it protection against
unauthorized use. MedQuist is not aware that any of its software, trademarks or
other proprietary rights infringe the proprietary rights of third parties.
Year 2000 Compliance
MedQuist is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two-digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. MedQuist
relies on its systems in operating and monitoring all aspects of its business.
MedQuist also relies on the external systems of its customers, suppliers and
other organizations with which it does business. Management is in the process of
assessing its internal and external systems to assure 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.
General Information Concerning 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.
For additional information concerning MedQuist see MedQuist's Annual Report
and other documents filed with the Commission and listed under "Incorporation of
Certain Documents by Reference" and "Summary--Selected Historical Financial
Information of MedQuist."
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INFORMATION CONCERNING DDI
Background
DDI provides electronic medical information processing services to
institutional health care providers, including hospitals and emergency medicine
facilities located in various parts of the country. DDI's business involves the
transcription of medical reports which have been dictated by physicians and
other medical professionals, into computer readable form and/or hard copy. DDI
was organized as a Virginia corporation, originally under the name Kabrumer
Transcriptions, Inc., in April 1989 and, in May 1989, acquired certain assets
from Kabrumer Transcriptions, a proprietorship operating a traditional local
medical transcription business serving the Washington, D.C. market and, through
a second office, the Pittsburgh market. The name of the corporation was changed
to Digital Dictation, Inc. in October 1989. In October 1995, DDI merger with and
into Sonochem, Inc., a publicly-held Delaware corporation, at which time the
surviving company changed its name to Digital Dictation, Inc. Thereafter, DDI
filed a Registration Statement on Form 10-SB with the Commission pursuant to
which it became a reporting company under Section 15(d) of the Exchange Act.
Centralized Management System
DDI has developed an operating concept of centralized management of remote
transcription and developed an integrated information processing and dictation
control system to support that operating concept. DDI's management believes that
DDI is one of the few firms in its industry that has successfully created a
centralized, automated transcription service, able to serve a national client
base from a single central location. DDI retains high caliber medical
transcriptionists, many of whom hold the designation of Certified Medical
Transcriptionist (CMT) from the American Association for Medical Transcription.
All of DDI's transcriptionists, referred to as independent medical
transcriptionists ("IMT's"), work from their homes throughout the country, and
are supported by a centralized transcription control and management system
located at DDI's Virginia Operations Center.
DDI has developed a proprietary in-hospital transcription processing system
that is electronically linked with DDI's centralized processing system in its
Virginia Operations Center. This in-hospital system provides automated
processing of all incoming transcriptions, enabling the hospital to eliminate
clerical positions formerly assigned to transcription processing. Dictated
reports are transcribed, edited, transmitted to hospitals, printed, up-loaded to
mainframe-based hospital information systems and faxed to physicians, all under
computer control, around the clock.
Customer Contracts
DDI generally enters into written contracts with its clients pursuant to
which DDI provides medical transcription services for a fixed fee per line of
transcription or per transcribed report. These contracts have a stated term that
varies in length from one to four years, with the majority of contracts
containing an automatic annual renewal clause with a price increase generally in
the amount of the applicable consumer price index. Most of DDI's contracts
enable the client to terminate the contract at any time without cause by
providing sixty days advance written notice.
Proprietary Software
All of the DDI's applications software has been developed in-house by its
employees, and the rights to such software are held exclusively by DDI. All
software is protected by copyrights through notices that appear on the computer
screen. DDI neither sells nor licenses its software to any other person or firm,
nor does it have any plans to do so in the future. DDI considers its proprietary
software to be an essential element in its ability to achieve and maintain a
competitive advantage. Moreover, management believes, the use of this software
is highly integrated with the organizational structure of DDI, thereby enhancing
its operational value to DDI.
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<PAGE>
Year 2000 Compliance
DDI has conducted a survey of the hardware and software currently being
used in the business and has audited how the software was created, either as
software created by DDI or hardware and software purchased from vendors. With
respect to the software created by DDI, the tools used to create these programs
have been certified by the vendor to be Year 2000 compliant. Furthermore, where
changes to the systems are necessary, DDI has current and accurate copies of the
source code, and there has been virtually no turnover in the staff that
developed these internal systems. The software and hardware developed by vendors
and used in DDI's business are generally Year 2000 compliant or have patches
available from the vendors to solve the problems for at least two decades into
the twenty-first century. Nevertheless, DDI is not currently free of Year 2000
problems, as the patches have not all been installed, adequate testing to
confirm that no unintended consequences will result from such patches has not
been conducted, and interfaces with hospital systems have not been investigated.
Management does not anticipate that DDI will incur significant expenses to be
Year 2000 compliant.
Description of Property
DDI's principal executive offices and its Virginia Operations Center occupy
approximately 4200 square feet of the first floor of 8230 Old Courthouse Road,
Vienna, Virginia, 22182. This facility, which is comprised of two separate
spaces first occupied by DDI in August 1991 and October 1996, is being leased
under two agreements through August 1999 and October 1999, respectively. DDI has
equipped this facility with computer, dictation, telephone and administrative
equipment necessary to support the operation. Management believes that all of
DDI's property is adequately covered by insurance and that either an extension
of the current lease or replacement space could be obtained at market rates.
Legal Proceedings
As of the date of this Prospectus, the management of DDI is not aware of
any legal proceedings to which DDI is a party.
Management's Discussion and Analysis of Financial Condition and Results of
Operations as of March 31, 1998
Result of Operations. DDI has reported average annual growth in revenues
over the past four fiscal years of 38%. DDI focuses on securing long-term
contracts for full-service (outsourced) medical transcription services rather
than overflow services from medical institutions. As a result, each client
contract produces a fairly consistent stream of revenue.
Total revenue from all contracts each week (the "run rate") is management's
key indicator of current financial performance. The acquisition of a new client
requires initial start-up expenses prior to the cut-over of service, and
thereafter results in an immediate positive impact on the weekly run rate, as
revenue is increased by the full weekly amount of the new contract. DDI has been
able to maintain its existing client base.
Annual revenues for the preceding five fiscal years were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $10,025,895 $6,936,730 $5,057,585 $3,838,076 $2,754,897
</TABLE>
The fact that DDI does not accept overflow contracts permits it to
anticipate a continuous stream of revenue and to plan and execute improvements
in technology and services which are designed to enhance client satisfaction and
retention. DDI's record of adding new clients while maintaining existing client
loyalty has resulted in a stable and generally predictable annual revenue growth
rate. As DDI continues to expand its market nationally and exploit its
26
<PAGE>
technology and client support, management anticipates the ability to continue to
increase annual revenue in line with historic trends, although there can be no
assurances that such annual revenue growth rates will be sustained.
Revenues for the first quarter of 1998 were 50.3% higher than revenues for
the first quarter of 1997 primarily as a result of net additions of hospitals
obtained as new clients, and by expansion of services among clients in the
existing client base. Quarter-to-quarter price increases have also occurred, but
are not a significant reason for the increase in revenues.
Cost of services, which includes all costs related to transcriptionists,
telephone and associated equipment depreciation, represented 63.9% of revenues
in the first quarter of 1997 as compared to 65.4% in the first quarter of 1998.
The increase in cost of services as a percentage of revenues is attributable
primarily to telecommunications costs. Telecommunications costs increased
substantially throughout calendar year 1997. During the second half of 1997, an
extensive software development program and re-design of the Company's
telecommunications network was undertaken. During the first quarter of 1998
there is redundant telecommunications expense as the shift in network facilities
begins. Costs of services are and will remain to be directly related to revenue
and it is expected that such costs will continue at the rate of approximately
two-thirds of total revenue.
General and administrative ("G&A") expenses consist primarily of salaries
and benefits of all technical, marketing, operations and client support,
administrative and executive personnel, occupancy costs, marketing and
promotional costs, and other administrative expenses. G&A expenses were 26.3% of
revenue in the first quarter of 1997 versus 23.9% of revenue in the first
quarter of 1998. G&A expenses decreased as a percentage of revenues because of
the spreading of fixed costs over a larger amount of revenue in 1998.
Operating income increased from 9.8% of revenue in the first quarter of
1997 to 10.7% of revenue in the first quarter of 1998. The increase in margin
illustrates DDI's ability to increase its revenue base without a similar
percentage increases in fixed expenses, which is in part due to its strategy of
nationwide expansion from a central operating facility. This is indicated by the
fact that revenues increased 50% compared to the first quarter of 1997 while G&A
expenses increased from the comparable quarter by approximately 37%.
Financial Condition. At March 31, 1998, DDI held cash and equivalents of
approximately $170,000, along with trade receivables of approximately
$1,480,000. As necessary to meet temporary cash flow shortages, DDI may draw
upon a $700,000 line of credit ($450,000 as of March 31, 1997) which remains
available through December 3, 2002; management expects to be able to renew the
line. There were no borrowings against the line of credit as of March 31, 1997
compared to borrowings of $214,000 as of March 31, 1998. Net cash flow from
operations was $638,777 for the three months ending March 31, 1997 and $478,455
in 1998. A major reason for the decrease in cash flow relates to the manner in
which income taxes were paid in prior years. Until 1996, DDI qualified to use
cash basis tax accounting, and thereafter was required to adopt accrual basis
tax accounting. The deferred tax liability is being paid over a four year
period.
Given that DDI is expected to grow at a rate in excess of its net profit
margin, it is possible the Company will need to secure a source of additional
funding to finance such growth. Management believes that projected increases in
revenues will be sufficient to fund the associated increases in operating costs
of DDI.
Management's Discussion and Analysis of Financial Condition and Results of
Operations as of December 31, 1997
Results of Operations
DDI has reported average annual growth in revenues over the past four
fiscal years of 38%. DDI focuses on securing long-term contracts for
full-service (outsourced) medical transcription services rather than overflow
services from medical institutions. As a result, each client contract produces a
fairly consistent stream of revenue paid on a weekly basis. Annual revenues for
the preceding five fiscal years were as follows:
27
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $10,025,895 $6,936,730 $5,057,585 $3,838,076 $2,754,897
</TABLE>
Total revenue from all contracts each week (the "run rate") is management's
key indicator of current financial performance. The acquisition of a new client
results in an immediate positive impact on the weekly run rate, as revenue is
increased by the full weekly amount of the new contract. At the same time, DDI
has been able to maintain its existing client base. As of December 31, 1997,
DDI's weekly "run rate" had grown to in excess of $215,000, compared to a rate
of approximately $140,000 as of December 31, 1996. The year-to-year "run rate"
increase is approximately fifty-four percent (54%). As DDI continues to expand
its market nationally and exploit its technology and client support, management
anticipates the ability to continue to increase annual revenue in line with
historic trends, although there can be no assurances that such annual revenue
growth rates will be sustained.
Financial Condition
At December 31, 1997, DDI held cash and equivalents of approximately
$2,500, along with net trade receivables of approximately $1,710,000.
As necessary to finance its growth rate, DDI may draw upon a $500,000 line
of credit obtained during 1997 which remains available through December 3, 2002,
subject to annual reviews. DDI expects to renew its line of credit beyond that
date. Borrowings against the line of credit, which totaled approximately
$132,000 as of December 31, 1997, bear interest at prime plus one per cent per
annum and are secured by all the assets of DDI. Given that DDI will continue to
grow at a rate in excess of its net profit margin, DDI will be required to draw
against its line of credit or acquire additional equity funding. Management
further believes that projected increases in future revenues will be sufficient
to fund the associated increases in operating costs of DDI. Net cash flow from
operations was approximately $1,147,000 in 1997 and $465,000 in 1996.
Results of Operations
Revenues increased by 45% from 1996 to 1997, and by 37% from 1995 to 1996.
Approximately 2% of the increase in revenues in both periods was due to price
increases to current customers; the remainder is due primarily to net additional
hospitals being taken on as clients. Throughout this period, DDI has continued
to provide the same basic level of service at the same general price level,
subject to adjustment for CPI increases, to all of its clients, both existing
and new. During 1997, DDI was successful in obtaining new clients that were
larger in size than the historical average of the "run rate" for its existing
clients. This resulted in favorable changes in operating margin, as described
below.
Cost of services, which includes all costs related to the IMT's, and
telephone and associated equipment depreciation, represented 63.8% of revenue in
1997 as compared to 64.7% in the prior year. Costs of services are generally
directly related to revenue and it is expected that such costs will continue at
the rate of approximately two-thirds of total revenue. The decrease of .9% as a
percentage of revenue compared to 1996 was due primarily to spreading
partially-fixed costs, such as depreciation, over a larger value of revenues. As
DDI continues to expand nationally by obtaining contracts with institutions
located outside the local telephone calling area, and because these new clients
are larger in size and require more sophisticated services, the amount of
telecommunications services used by DDI will continue to grow as a percentage of
revenue. However, DDI instituted a major internal software development project
during 1997 to convert its telecommunications facilities from variable cost
(based on minutes of usage) to fixed cost of a virtual private network. If this
conversion of facilities and software development is successful, and DDI
continues to increase its revenues, it will result in future increases in margin
as a result of spreading fixed costs over a larger base of revenues.
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<PAGE>
General and administrative ("G&A") expenses consist primarily of salaries
and benefits of all technical, marketing, operations and client support,
administrative and executive personnel, occupancy costs, marketing and
promotional costs, recruiting and other administrative expenses. G&A expenses as
a percentage of revenue increased to 25.9% of revenue in 1997 versus 24.7% of
revenue in 1996. There were two primary reasons for the increase, and one reason
the increase was not greater than it otherwise would have been. The reasons for
the increase are: a) each addition of a new hospital client results in one-time
expenses for marketing, sales service, systems and procedures set-up, and
commission expenses related to securing the hospital as a client and assuring a
smooth and successful cut-over of services to DDI, and b) recruiting expenses
and salaries to increase the size and capability of DDI's software systems
staff. These expenses are estimated to represent an increase in G&A expense from
1996 to 1997 of 3.0% of revenue. During 1997, DDI initiated a comprehensive
re-engineering of its telecommunications platforms and software. The project has
not been completed, and some systems development salary and other expense has
been deferred until the project is completed and placed in service. The
capitalized project costs, if expensed in 1997 would have increased G&A by 1.7%
of revenue. There were no such costs in 1996. All other expenses amounted to a
decrease of .1% of revenue and were due to spreading of fixed expenses over a
larger amount of revenue.
Operating income increased by 41% from $729,800 in 1996 to $1,029,503 in
1997. As a percentage of revenue, the operating margin was 10.5% and 10.3%
respectively in the two years.
Interest expense decreased from $39,187 in 1996 to $23,169 in 1997,
primarily reflecting decreased borrowing against DDI's line of credit to finance
accounts receivable balances.
Changes in and Disagreements with Accountants
DDI has had no disagreements with its independent accountants, Hozik &
Charin, on any matter of accounting principles or practices or financial
statement disclosure. Hozik & Charin have been DDI's independent accountants
since 1993.
General Information Regarding DDI
DDI's principal executive offices are located at 8230 Old Courthouse Road
Vienna, Virginia 22182, and its telephone number is (703) 848-2830.
29
<PAGE>
THE MERGER
Terms of the Merger Agreement
The following is a brief summary of certain terms of the Merger Agreement.
This summary is qualified in its entirety by reference to the Merger Agreement,
which is attached hereto as Annex B. All persons are urged to read the Merger
Agreement in its entirety.
On May 28, 1998, MedQuist and TL entered into the Merger Agreement with DDI
and the Principal Shareholders. Prior to the execution of the Merger Agreement,
the Principal Shareholders together owned 5,908,673 shares of DDI Common Stock,
which represented approximately 93.4 percent of the outstanding shares of DDI
Common Stock. Under the terms of the Merger Agreement, the Principal
Shareholders exchanged each of their shares of DDI Common Stock for 0.1440899
shares of MedQuist Common Stock, for a total of 851,376 shares (adjusted to
reflect a two for one stock split effected on June 15, 1998) of MedQuist Common
Stock upon execution of the Merger Agreement.
The Merger
The Merger was approved by the Board of Directors of DDI pursuant to a
unanimous written consent dated May 28, 1998 and by a majority of the
stockholders of DDI pursuant to a written consent of stockholders dated May 28,
1998. No further action on the part of DDI stockholders is required to effect
the Merger. TL and DDI intend to consummate the Merger on July 31, 1998, at
which time DDI will merge with and into TL, with TL being the surviving
corporation.
Conversion of Shares; Exchange of Stock Certificates; No Fractional Amounts
At the Effective Time, pursuant to the Merger Agreement, each share of DDI
Common Stock issued and outstanding immediately prior to the Effective Time
(other than shares held by TL, which shares so held by TL will be canceled, and
shares owned by stockholders who perfect their statutory appraisal rights under
Delaware law and do not withdraw such right) will be, by virtue of the Merger
and without any action on the part of the record holder thereof (the "Public
Shareholders"), converted into the right to receive 0.1440899 shares of MedQuist
Common Stock (the "Exchange Ratio"). The Exchange Ratio was determined as
follows: (i) through negotiations, TL and DDI agreed that the price per share of
DDI Common Stock in the Merger would be $3.2033 (See "--Reasons for the
Merger"); and (ii) $3.2033 was then divided by $22.23125 (adjusted to reflect a
two for one stock split effected on June 15, 1998) the agreed value of a single
share of MedQuist Common Stock based upon contemporaneous trading (the "MedQuist
Share Value"). The MedQuist Common Stock issuable to holders of shares of DDI
Common Stock pursuant to the Merger and any cash to be paid in lieu of
fractional shares of MedQuist Common Stock are referred to collectively as the
"Merger Consideration." No fractional shares of MedQuist Common Stock will be
issued pursuant to the Merger. Each DDI stockholder who otherwise would have
been entitled to a fraction of a share of MedQuist Common Stock will receive in
lieu thereof cash in accordance with the terms of the Merger. MedQuist has
caused the shares of MedQuist Common Stock issuable to the Public Shareholders
to be listed on the Nasdaq National Market.
Accompanying this Prospectus is a form of letter of transmittal and
instructions for use in surrendering Certificates and receiving the
consideration to which each Public Shareholder is entitled pursuant to the Plan
of Merger. Each Public Shareholder holding Certificates should surrender such
Certificates to the Exchange Agent together with the letter of transmittal duly
executed and completed in accordance with the instructions thereto, and each
Public Shareholder will be entitled to receive in exchange therefor certificates
for shares of MedQuist Common Stock and a check for any cash which may be
payable in lieu of a fractional share of MedQuist Common Stock. Public
Shareholders who wish to exercise their appraisal rights should not surrender
such Certificates to the Exchange Agent. See "--Appraisal Rights."
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<PAGE>
Each outstanding Certificate (other than Certificates evidencing shares of
DDI Common Stock held by TL, which will be canceled, or stockholders who perfect
their statutory appraisal rights under Delaware law and do not withdraw such
right), which prior to the Merger represented DDI Common Stock, until so
surrendered and exchanged, will be deemed, for all purposes, to evidence only
the right to receive the Merger Consideration that the Public Shareholder
holding such Certificate is entitled to receive pursuant to the terms of the
Merger Agreement.
Treatment of DDI Stock Options
At the Effective Time, each outstanding unexpired option to purchase shares
of DDI Common Stock (a "DDI Stock Option") which was granted pursuant to DDI's
1996 Non-Qualified Stock Option Plan, as amended (the "DDI Stock Option Plan"),
will be cancelled and extinguished and converted into equivalent options to
purchase MedQuist Common Stock ("MedQuist Stock Options"). Each holder of DDI
Stock Options will receive an option to purchase 0.1440899 shares of MedQuist
Common Stock for each DDI Stock Option held by such optionholder at the
Effective Time. The exercise price for the MedQuist Stock Options is equal to
the product of (i) (A) the respective exercise price of the each DDI Stock
Option for which the MedQuist Stock Option is being converted and issued in
place thereof divided by (B) $3.2033, multiplied by (ii) $22.23125 (adjusted to
reflect a two for one stock split effected on June 15, 1998); provided, however,
that such exercise price shall be rounded up to the nearest cent. The duration
and other terms of each MedQuist Stock Option is the same as that of each DDI
Stock Option exchanged therefor.
MedQuist has reserved for issuance a sufficient number of shares of
MedQuist Common Stock for delivery upon exercise of the MedQuist Stock Options
exchanged for DDI Stock Options in accordance with the Merger Agreement, and
such shares of MedQuist Common Stock have been registered with the Commission
pursuant to a Registration Statement on Form S-8.
Surviving Representations and Warranties; Escrowed Shares
In the Merger Agreement, DDI and the Principal Shareholders made certain
representations and warranties to MedQuist and TL regarding, among other things,
the business, assets and liabilities of DDI. Certain of the representations and
warranties of DDI and the Principal Shareholders, relating to (i) DDI's
financial Statements and reports, (ii) any undisclosed liabilities of DDI, (iii)
DDI's taxes, (iv) DDI's assets, (v) DDI's accounts receivable, and (vi) DDI's
net worth (each a "Surviving Warranty"), shall survive until the earlier of (a)
the completion of the first independent audit, following the First Closing Date,
of the consolidated financial statements of MedQuist in which the Surviving
Corporation's financial statements are included, or (b) one (1) year from the
date of the Merger Agreement, May 28, 1999 (the "Survival Period").
Under the Merger Agreement, ten percent of the shares of MedQuist Common
Stock received in the Merger by the Principal Shareholder were deposited and, by
the Public Shareholders will be deposited (the "Escrowed Shares"), in escrow
with Crestar Bank (the "Escrow Agent") to cover any damages incurred by MedQuist
and TL as a result of the breach of any Surviving Warranty. If, prior to the
expiration of the Survival Period, TL in good faith determines that DDI or the
Principal Shareholders breached a Surviving Warranty as of the First Closing
Date and TL incurs, or becomes reasonably likely to incur, damages as a result
of such breach (a "Claim"), then TL shall deliver a notice of Claim ("Claim
Notice") to the Escrow Agent and the Principal Shareholders, for themselves and
as agents for the Public Shareholders, setting forth the nature of such Claim
and the estimated amount of damages from such Claim. If the Principal
Shareholders do not object or are deemed not to have objected to such claim
pursuant to the terms of the Merger Agreement, TL shall be entitled to have the
Escrow Agent return and the Escrow Agent shall return to TL such number of the
Escrowed Shares having a value, based on the MedQuist Share Value, equal to the
aggregate dollar amount of TL's damages set forth in the Claim Notice, up to the
total number of Escrowed Shares then held by the Escrow Agent. Such Escrowed
Shares shall be deducted from the total number of Escrowed Shares so held on a
pro rata basis from all shares therein held based upon the number of Escrowed
Shares held by the Principal Shareholders and the Public Shareholders.
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If the Principal Shareholders dispute the amount of damages set forth in
any Claim Notice, the Escrow Agent shall return to TL such of the Escrowed
Shares as are not subject to such dispute and the number of Escrowed Shares that
are the subject of such dispute shall be held by the Escrow Agent until such
dispute is resolved. Subject to the foregoing, at the expiration of the Survival
Period, the Escrow Agent shall deliver to the DDI stockholders any of the
Escrowed Shares then in the Escrow Agent's possession.
The Principal Shareholders, for themselves and on behalf of the Public
Shareholders, will, within twenty (20) days after receipt of a Claim Notice,
deliver to TL and the Escrow Agent a written notice ("Dispute Notice") stating
either that the Principal Shareholders agree with TL's Claim or that they object
in good faith to the validity of such Claim and setting forth in reasonable
detail the grounds on which the Principal Shareholders are contesting the
validity of the Claim. Any failure of the Principal Shareholders to deliver such
Dispute Notice within such twenty (20) day period shall be conclusively deemed
to be acceptance of such adjustment for themselves and on behalf of the Public
Shareholders.
Registration Rights
Pursuant to the terms of the Merger Agreement, MedQuist is required to
prepare and file with the Commission a Registration Statement on Form S-3 for
the purpose of registering for resale the shares of MedQuist Common Stock issued
to the Principal Shareholders pursuant to the Merger Agreement.
Background of the Merger
On February 10, 1998, DDI announced that it experienced 44.5% revenue
growth and 42.1% earnings growth in 1997. Following this announcement, members
of senior management of MedQuist and DDI entered into discussions regarding the
basic operational synergies and other strategies of the companies and their
competitors, with each company concluding that the potential benefits of
combining MedQuist and DDI were significant. During this time period, MedQuist
also retrieved and reviewed relevant financial and other information of DDI
filed with the Commission and made a preliminary internal valuation of DDI.
On March 4, 1998, Richard Cameron, DDI's Chief Executive Officer, met with
David Cohen, MedQuist's Chief Executive Officer, and other members of MedQuist's
senior management at MedQuist's offices in Marlton, New Jersey in order to
discuss in more detail the operating strategies of the companies, the potential
synergies resulting from a combination and integration issues that may arise in
the event of a combination. At the conclusion of the meeting, the parties agreed
that a combination of the companies made sense and that negotiations regarding a
potential merger of the companies should proceed.
On March 9, 1998, MedQuist sent DDI a non-binding offer letter outlining
the proposed terms of a merger qualifying for pooling of interest accounting
treatment. Mr. Cameron reviewed the offer with the DDI Board of Directors (the
"DDI Board"), and then replied to MedQuist by letter dated March 12, 1998,
noting that, while a combination was desirable both operationally and
financially, MedQuist's proposed valuation of DDI was not acceptable. Although
Mr. Cameron recognized that the valuation was fair when compared to other
medical transcription companies recently sold, he opined that, in light of the
short term achievable value of DDI, the valuation was too low. Nevertheless, Mr.
Cameron indicated a willingness to continue discussions.
DDI and MedQuist continued further negotiations and discussions during the
period from March 12, 1998 through March 20, 1998. On that date, Mr. Cameron
communicated to MedQuist that, although the combination was an optimum strategy
for both companies, DDI continued to believe it deserved a higher valuation
under the belief that it could achieve its projected earnings and revenue
growth.
Thereafter, until April 20, 1998, MedQuist and DDI continued to explore
alternative combination structures. During this time period, DDI provided more
detailed information regarding its growth prospects and anticipated margin
32
<PAGE>
improvements. The parties also identified anticipated savings as a result of any
combination. In light of the additional information, MedQuist indicated a
willingness to increase its valuation of DDI.
On April 20, 1998, members of MedQuist's senior management met in
Philadelphia, Pennsylvania with Mr. Cameron and Mr. Charles McGettigan, a
director and a principal of DDI's financial advisor, McGettigan, Wick & Co.,
Inc. During that meeting, the parties agreed to commence an in depth due
diligence investigation of DDI. Following additional negotiations, on April 28,
1998, the parties entered into a non-binding agreement to conduct due diligence
and negotiate a definitive agreement. Shortly thereafter, a first draft of a
definitive agreement was circulated to the parties which, following negotiations
of legal and financial terms, resulted in the Merger Agreement, which was
executed on May 28, 1998. The Principal Shareholders approved the Merger by
written consent delivered on May 28, 1998.
MedQuist's Reasons for the Merger
At its annual Board Retreat in January, 1998, MedQuist management made a
formal presentation to the MedQuist Board of Directors (the "MedQuist Board")
regarding the advantages and disadvantages of making acquisitions using MedQuist
Common Stock in transactions qualifying for pooling of interests accounting
treatment. After considerable discussion, the MedQuist Board recognized that the
ability to use MedQuist Common Stock in such transactions represented a distinct
advantage over MedQuist's principal competitors, whose ability to engage in such
transactions was limited primarily because they were not publicly traded or had
significantly lower liquidity or market value. In addition, the MedQuist Board
recognized that the higher the price of MedQuist Common Stock, the lower the
cost of capital when using MedQuist Common Stock for acquisitions. Accordingly,
as a matter of strategy, the MedQuist Board directed management to pursue
actively transactions using MedQuist Common Stock and qualifying for pooling of
interests accounting treatment.
MedQuist initially contacted DDI on February 10, 1998. The status of
negotiations and an analysis of the strategic benefits and potential synergies
of the proposed transaction were reviewed with the MedQuist Board at its Regular
Meeting on April 22, 1998. The MedQuist Board, however, did not vote on the
transaction at that time.
After the April 22, 1998 meeting, MedQuist's Chief Executive Officer made
periodic phone calls to MedQuist Board members keeping them apprised of the
status of negotiations. On May 4, 1998, each member of the MedQuist Board
received a package of additional information regarding DDI and the proposed
transaction, including proposed terms, DDI's most recent quarterly and annual
SEC filings, DDI's most recent earnings release and an analysis of the
anticipated build up of DDI's revenues for the remainder of 1998.
A special meeting of the MedQuist Board was held on May 27, 1998, at which
the directors discussed, among other things: (i) the combination, including the
history of negotiations, strategic and synergistic benefits of a combination,
DDI's historical and projected finances, the availability of pooling of
interests accounting treatment; (ii) operational, financial and legal due
diligence investigations; and (iii) the terms of the Merger Agreement. Based on
the foregoing and the more detailed information set forth below, the MedQuist
Board unanimously approved the Merger Agreement and the transactions
contemplated under the Merger Agreement.
In reaching its determination to approve the Merger, the MedQuist Board
relied upon and consulted with MedQuist's senior management and their accounting
and legal advisors and considered the following matters:
Tax and Accounting Treatment. The MedQuist Board considered the expectation
that the Merger will be a tax-free transaction and would be accounted for as a
pooling of interests.
Earnings Per Share Accretion. Excluding one time costs associated with the
transaction, the Merger is expected to be accretive to MedQuist's earnings per
share for 1998 and thereafter. In addition, the acquisition of DDI was expected
to be consistent with the strategy of MedQuist to maintain above average growth
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in both revenues and earnings per share in order to provide superior returns to
its shareholders when compared with known publicly traded and other know
privately held competitors.
Consolidation; Economies of Scale. The medical transcription industry is
undergoing a rapid consolidation. The MedQuist Board considered that scale is an
important competitive factor, with the largest participants able to leverage key
resources. In addition, as the hospital industry continues to consolidate, grow
in size and become decentralized, information needs tend to increase in
complexity. As a result, providers and payors increasingly require larger more
sophisticated transcription vendors like MedQuist. Similarly, the MedQuist Board
considered that MedQuist's size, when compared to smaller vendors, permits it to
leverage capital and human resources to fund the cost of research and
development and to provide more sophisticated services, which are believed
necessary to attract and retain customers.
Management. The MedQuist Board believes that the strength of the DDI
management and research and development teams will provide long term benefits to
MedQuist.
Technology. DDI has technologies in place that may enable MedQuist to
reduce its telecommunication costs and/or hire remote transcriptionists at a
lower cost. Similarly, MedQuist has technologies that should enable DDI to
improve the service delivered to its clients. Although the MedQuist Board
acknowledged that it is too early to predict the impact on earnings, if any,
resulting from such additional technology, the Board determined that the
companies' respective technologies were potentially complimentary.
Stronger Combined Companies; Improved Liquidity. The combined companies are
expected to have greater earnings and cash flow, higher market capitalization
and a stronger balance sheet. This is expected to help MedQuist realize its
growth potential and to continue to pursue development opportunities. In
addition, the Merger is expected to be consistent with MedQuist's strategy to
increase the market capitalization and liquidity of its shares of Common Stock,
while minimizing the impact of ownership dilution resulting from issuing
additional shares. The MedQuist Board believes that issuing shares in connection
with the Merger is preferable to an offering of primary shares, because the
proceeds of the issuance are immediately invested for shareholders in the
acquired company.
Cash Flow Analysis. In addition to earnings per share accretion, the
MedQuist Board considered the cost of the transaction as a multiple of cash
flow, which the MedQuist Board deemed to be reasonable.
Reductions in Overhead. The MedQuist Board believes that the combined
companies should be able to reduce corporate overhead costs by combining
accounting, financial, legal, human resources and other corporate overhead.
Increased Market Penetration; Geographic Diversification. Although DDI
operates on a national basis, its office is located in the Washington, D.C.
area. The MedQuist Board considered that, to date, MedQuist has not penetrated
that market very well and the reputation of DDI in that market should enable
MedQuist to capitalize on additional growth opportunities. In addition, the
Board determined that geographic diversity may improve the long term stability
of earnings and cash flow by reducing the impact of any regional cyclical
downturns.
Certain Risks. The MedQuist Board also considered various risks of the
transaction, including those set forth herein under "Risk Factors," and
determined that the potential benefits outweighed such risks.
The foregoing discussion of the information and factors considered by the
MedQuist Board is not exhaustive. The MedQuist Board did not quantify or attempt
to assign relative weights to the importance of these factors. Rather, the
MedQuist Board made a decision based upon the totality of the information
presented at the various board meetings, informal calls and otherwise
distributed to the MedQuist Board. In addition, different Board members may have
assigned different importance to each of the factors.
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DDI's Reasons for the Merger
In reaching its decision to enter into the Merger Agreement, the DDI Board
considered its own due diligence investigation, due diligence conducted by
management, the advice of its financial advisors, and presentations of
management. Without limiting the generality of the foregoing, the DDI Board
considered the following factors without assigning any relative weights to any
of the individual factors:
Need to Increase Size. The DDI Board considered that MedQuist is one of the
largest medical transcription companies in the United States. The medical
transcription industry, which has been characterized by small, local and
regional providers, is rapidly consolidating, resulting in fewer and larger
providers. The DDI Board considered that larger companies are able to provide
increasingly sophisticated services to clients at lower costs because of their
ability to leverage resources and apply technology over a broader base of
revenues. In order to compete effectively, the DDI Board felt that it would
eventually be necessary to merge with a larger company or become a leader in
consolidation. The DDI Board considered that MedQuist has demonstrated its
leadership in the medical transcription industry.
Improved Financial Strength. The DDI Board considered that the combined
companies would have an improved balance sheet and increased cash flow and
earnings, enhancing the financial strength of DDI. Absent the combination, DDI
had limited financial strength to be a leader in the consolidation of the
industry. The DDI Board believed that combining with MedQuist would provide the
financial and strategic position to actively pursue development and
consolidation opportunities.
Higher Profile and Increased Liquidity for Shareholders. Although a public
company, DDI traded on the Nasdaq Bulletin Board and had no financial analysts
covering its stock. With only approximately 6% of its outstanding shares
publicly traded, the liquidity of its shares was extremely limited, averaging
only 4,300 shares per day traded for the four weeks ending May 22, 1998, and DDI
Common Stock often did not trade for weeks at a time. The market capitalization
of DDI as of February 1, 1998, prior to any contacts with MedQuist, was
approximately $10 million. The DDI Board believed that the low market
capitalization and thin float of its publicly traded shares were major
deterrents in attracting analyst coverage and institutional interest in
purchasing the shares. The DDI Board considered that MedQuist, on the other
hand, trades on the Nasdaq National Market and is actively followed by analysts
from nine investment banking firms. The average daily trading volume of MedQuist
for the four weeks ending May 22, 1998 was over 22,000 shares. In addition, the
market capitalization of MedQuist as of that date was approximately $500
million. The DDI Board considered that the higher investment profile and greater
liquidity resulting from exchanging DDI shares for MedQuist Common Stock was in
the long term best interests of the DDI shareholders.
Premium Purchase Price. In addition to the benefits of improved liquidity
and higher investment profile, the DDI Board considered the benefits of the
purchase price premium. In 1997, the stock traded between a low of $0.375 and a
high of $3.25. The average price for a share of DDI Common Stock was $0.80 for
all of 1997 and the average price per share for the period from January 1, 1998
through May 27, 1998 was $1.67. The December 31, 1997 closing price of a share
of DDI Common Stock was $1.6875 and the closing price on May 27, 1998, the day
before the DDI Board approved the transaction and the Merger Agreement was
executed was $2.875. The DDI Board considered that the exchange price of $3.2033
per share of DDI Common Stock represented a significant premium. Specifically,
the exchange price was a premium of approximately: (i) 300% over the average
1997 price; (ii) 90% over the December 31, 1997 price; (iii) 92% over the
average 1998 price; and (iv) 11% over the closing price on May 27, 1998. In
addition, the DDI Board did not believe that the trading price could be
maintained if the number of shares offered for public sale increased to any
significant degree over historical volumes. The DDI Board also considered that,
as a multiple of cash flow, the purchase price was at a substantial premium to
other publicly disclosed acquisitions of medical transcription companies and
almost double an unsolicited offer that DDI had earlier received and rejected.
Enhanced Prospects. The DDI Board considered that the prospects for the
combined companies were greater than the prospects for DDI as a stand alone
company and the shareholders of DDI would participate in those enhanced
prospects.
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Strategic Fit. The DDI Board considered the strategic fit between MedQuist
and DDI, including the possibility for cost savings from leveraging overhead and
potential technological synergies for each company.
Merger Agreement. The DDI Board considered the terms and conditions of the
Merger Agreement.
Tax and Accounting Treatment. The DDI Board considered the expectation that
the Merger will be a tax-free transaction to DDI and its shareholders and will
be accounted for by MedQuist as a pooling of interests transaction.
Advice of McGettigan, Wick & Co, Inc. The DDI Board considered the advice
of its financial advisors, McGettigan, Wick & Co, Inc. ("McGettigan, Wick"). The
DDI Board recognized the fact that McGettigan, Wick would receive a $200,000 fee
in connection with the transaction and that both Charles C. McGettigan and Myron
A. Wick, III are members of the DDI Board and affiliates of Proactive, Lagunitas
and G&M, three of the Principal Shareholders who together then held
approximately 47% of the outstanding shares of DDI Common Stock. Nevertheless,
Messrs. McGettigan and Wick each have substantial investment experience, and the
DDI Board relied upon their financial and strategic advice and due diligence
investigation. Based on the factors identified above, the DDI Board did not seek
a formal opinion regarding the adequacy of the Merger Consideration.
Principal Shareholders. The DDI Board also considered the interests of the
Principal Shareholder generally. The Board recognized the fact that all of the
Principal Shareholders, who together then held approximately 93.4% of the
outstanding shares of DDI Common Stock, were in favor of the transaction. The
Board considered it particularly important that the Principal Shareholders would
receive the same Merger Consideration as the Public Shareholders.
The DDI Board also considered certain countervailing factors associated
with the Merger, especially the following:
MedQuist's Premium Share Price. The DDI Board considered the fact that
MedQuist's shares had appreciated very rapidly over the last two years. However,
the DDI Board also recognized that MedQuist had demonstrated consistent annual
earnings and revenue growth in excess of 35% during that time period and that
MedQuist's shares were likely undervalued two years ago.
Lack of Board Influence. The DDI Board considered that it would not have
any seats on the MedQuist Board.
Integration Risks. The DDI Board considered the general risks associated
with integrating DDI into MedQuist and the fact that this was the largest
acquisition by MedQuist of a medical transcription company since it acquired TL
in May 1994.
Although the DDI Board considered the above risk factors in approving the
Merger, the DDI Board concluded that the potential unfavorable aspects of the
Merger were outweighed by the potential benefits.
Certain Consequences of the Merger
As a result of the Merger, the holders of DDI Common Stock (other than
those who perfect their appraisal right) will become shareholders of MedQuist.
Upon the consummation of the Merger, each outstanding share of DDI Common Stock
(except for shares of DDI Common Stock held by TL, which will be canceled, and
shares owned by stockholders who perfect their statutory appraisal rights under
Delaware law and do not withdraw such rights) will be converted into the right
to receive the Merger Consideration. The additional shares of MedQuist Common
Stock to be issued pursuant to the Merger have been approved for listing on the
Nasdaq National Market, subject to notice of issuance. See "--Nasdaq Listing."
After the issuance of the shares of MedQuist Common Stock issuable pursuant to
the Merger, the MedQuist shareholders immediately prior to the execution of the
Merger Agreement will own approximately 96.07% of the outstanding shares of
MedQuist Common Stock, the Principal Shareholders will own approximately 3.71%
of the outstanding shares of MedQuist Common Stock, and the Public Shareholders
will own approximately 0.22% of the outstanding shares of MedQuist Common Stock.
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As a result of the Merger, DDI will no longer exists as a corporation and
there will be no public market for DDI Common Stock. DDI Common Stock will
cease to be traded on the Nasdaq Bulletin Board and the registration of DDI
Common Stock under the Exchange Act will be terminated.
The composition of MedQuist's and TL's Boards of Directors and management
will not been affected by the Merger.
MedQuist and TL currently expect to continue to operate DDI's business as
it was operated prior to the Merger although MedQuist and TL intends to utilize
the services of DDI in connection with the provision of services to MedQuist's
and TL's customers nationwide.
Interests of Certain Persons in the Merger
David A. Cohen, Chairman of the Board and Chief Executive Officer of DDI
since May 28, 1998, is also a Chairman of the Board and the Chief Executive
Officer of MedQuist. John A. Donohoe, John R. Emery and John M. Suender,
executive officers of MedQuist, have been executive officers of DDI since May
28, 1998.
Richard D. Cameron, the former Chairman of the Board and Chief Executive
Officer of DDI and one of the Principal Shareholders, held approximately 46.4%
of the outstanding shares of DDI Common Stock prior to the execution of the
Merger Agreement. Mr. Cameron has entered into a one year employment agreement
with TL pursuant to which he will earn a base salary of $100,000.
McGettigan, Wick & Co., Inc. ("McGettigan, Wick") served as DDI's financial
advisors, and received a fee of $200,000 for their role in advising DDI in
connection the Merger. Charles C. McGettigan and Myron A. Wick III, two of the
principals of McGettigan, Wick, were members of the DDI Board that approved the
Merger. In addition, McGettigan, Wick and Messrs. McGettigan and Wick are
affiliates of Proactive, Lagunitas and G&M, three of the Principal Shareholders
which together held approximately 47% of the outstanding shares of DDI Common
Stock prior to the execution of the Merger Agreement.
Accounting Treatment
MedQuist and DDI believe that the Merger will qualify as a "pooling of
interests" for accounting and financial reporting purposes, and have been so
advised by their respective independent public accountants. The unaudited pro
forma financial information contained in this Prospectus has been prepared using
the "pooling of interests" accounting method to account for the Merger. See
"Unaudited Pro Forma Combined Financial Data."
On May 28, 1998, MedQuist received a letter from Arthur Andersen LLP,
independent public accountants for MedQuist to the effect that MedQuist and the
Merger and transactions contemplated thereby qualify for "pooling of interests"
accounting treatment and DDI received a letter from Hozik & Charin, independent
public accountants for DDI, to the effect that DDI will qualify as a "combining
company" as required for "pooling of interests" accounting treatment. In
addition, both MedQuist and DDI have agreed not to take any action or fail to
take any action that would jeopardize the treatment of the Merger as a "pooling
of interests."
Certain Federal Income Tax Consequences
The following is a summary description of the material United States
federal income tax consequences of the Merger to DDI and the DDI stockholders
who receive MedQuist Common Stock pursuant to the Merger or perfect appraisal
rights. This summary is not a complete description of all of the tax
consequences of the Merger and, in particular, does not address tax
considerations which may affect the treatment of certain special status
taxpayers such as financial institutions, broker-dealers, life insurance
companies, tax-exempt organizations, investment companies and foreign taxpayers
or of DDI stockholders who do not hold their DDI Common Stock as a capital asset
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at the Effective Time. In addition, no information is provided herein with
respect to the tax consequences of the Merger either under applicable foreign,
state or local laws or to persons who acquire DDI Common Stock pursuant to
employee stock options or otherwise as compensation.
The following discussion is based on the Code, as in effect on the date of
this Prospectus, without consideration of the particular facts or circumstances
of any particular holder of DDI Common Stock. DDI and MedQuist have not sought
and will not seek any rulings from the Internal Revenue Service or any opinions
of counsel with respect to any of the matters discussed herein. The Merger is
expected to qualify as a reorganization within the meaning of Section 368(a) of
the Code. Assuming the Merger qualifies as a reorganization within the meaning
of Section 368(a) of the Code, no gain or loss will be recognized by DDI
stockholders upon their exchange of DDI Common Stock for MedQuist Common Stock,
except that any DDI stockholder who receives cash proceeds in lieu of a
fractional share interest in MedQuist Common Stock will recognize gain or loss
equal to the difference between such cash proceeds and the tax basis in the
fractional share interest, and such gain or loss will constitute capital gain or
loss if such stockholder's DDI Common Stock was held as a capital asset at the
Effective Time.
A DDI stockholder who perfects appraisal rights with respect to his or her
shares of DDI Common Stock, and who does not withdraw such rights, should, in
general, treat the difference between the tax basis of the shares of DDI Common
Stock held by such person with respect to which such appraisal rights are
perfected and the amount received in payment therefor as capital gain or loss.
However, depending on the DDI stockholder's particular circumstances, such
amount might be treated for federal income tax purposes as dividend income. See
"-- Appraisal Rights."
THE FOREGOING IS A GENERAL DISCUSSION OF CERTAIN MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER FOR DDI AND DDI STOCKHOLDERS AND IS INCLUDED FOR
GENERAL INFORMATION ONLY. THE FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT
THE PARTICULAR FACTS AND CIRCUMSTANCES OF EACH DDI STOCKHOLDER'S TAX STATUS AND
ATTRIBUTES. ACCORDINGLY, EACH DDI STOCKHOLDER SHOULD CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICATION
AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS
OF CHANGES IN SUCH TAX LAWS.
Regulatory Approvals
No federal or state regulatory approval was required in connection with the
Merger.
Nasdaq Listing
The shares of MedQuist Common Stock to be issued in connection with the
Merger have been approved for listing on the Nasdaq National Market, subject to
notice of issuance.
Appraisal Rights
Holders of DDI Common Stock are entitled to appraisal rights under Section
262 ("Section 262") of the DGCL in connection with the Merger, provided that
they comply with the conditions established by Section 262. Holders of MedQuist
Common Stock are not entitled to appraisal rights under the New Jersey Business
Corporation Act (the "NJBCA") in connection with the Merger.
The following discussion of the provisions of Section 262 is not intended
to be a complete statement of such provisions and is qualified in its entirety
by reference to the text of Section 262, which is reproduced in full as Annex A
to this Prospectus.
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Former stockholders who held DDI Common Stock on the Effective Time and who
follow the procedures specified in Section 262 will be entitled to have their
shares of DDI Common Stock appraised by the Delaware Court of Chancery (the
"Court") and to receive payment of the "fair value" of such shares, exclusive of
any element of value arising from the accomplishment or expectations of the
Merger, as determined by the Court. The procedures set forth in Section 262
should be strictly complied with. Failure to follow any of such procedures may
result in a termination or waiver of appraisal rights under Section 262.
Any stockholder entitled to appraisal rights may, prior to July 22, 1998,
demand from TL the appraisal of any or all of his or her shares of DDI Common
Stock by delivering a written demand for an appraisal to Corporate Secretary,
TL, Incorporated, Corporation Trust Center, 1209 Orange Street, Wilmington,
Delaware 19801 stating the identity of the stockholder and that the stockholder
intends by such notice to demand the appraisal of his or her shares. Demand is
necessary if the stockholder is to perfect his or her appraisal rights.
The written demand for appraisal must be made by or for the holder of
record of DDI Common Stock registered in his or her name. Accordingly, such
demand should be executed by or for such stockholder of record, fully and
correctly, as such stockholder's name appears on his or her stock certificates.
If the applicable shares of DDI Common Stock were owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution of the demand
should be made in such capacity, and if the applicable shares of DDI Common
Stock were owned of record by more than one person, as in a joint tenancy or
tenancy in common, such demand should be executed by or for all joint owners. An
authorized agent, including one of two or more joint owners, may execute the
demand for appraisal for a stockholder of record. However, the agent must
identify the record owner(s) and expressly disclose the fact that, in executing
the demand, he or she is acting as agent for the record owner(s). If a
stockholder held shares of DDI Common Stock through a broker who in turn held
the shares through a central securities depository nominee such as Cede & Co., a
demand for appraisal of such shares must be made by or on behalf of the
depository nominee and must identify the depository nominee as the holder of
record.
A record owner may exercise appraisal rights with respect to all or less
than all of the shares held of record. If the record owner desires to exercise
appraisal rights as to a portion of his or her shares, the written demand should
set forth the number of shares covered by it. Where no number of shares is
expressly mentioned, the demand will be presumed to cover all shares of DDI
Common Stock standing in the name of such record owner.
Within 120 days after the Effective Time, TL or any stockholder of DDI who
has complied with the demand requirements and who is otherwise entitled to
appraisal rights, may file a petition in the Court demanding a determination of
the value of the DDI Common Stock of all former stockholders of DDI who have
complied with the demand requirements and who are otherwise entitled to
appraisal rights. Notwithstanding the foregoing, at any time within 60 days
after the Effective Date, any stockholder has the right to withdraw his or her
demand for appraisal and to accept the terms offered in the Merger. If no such
petition is filed, appraisal rights will be lost for all stockholders who had
previously demanded appraisal of their DDI Common Stock. Holders of DDI Common
Stock seeking to exercise appraisal rights should not assume that TL will file a
petition with respect to the appraisal of the value of their DDI Common Stock or
that TL will initiate any negotiations with respect to the "fair value" of such
DDI Common Stock. Accordingly, such stockholders should regard it as their
obligation to take all steps necessary to perfect their appraisal rights in the
manner prescribed in Section 262.
Within 120 days after the Effective Time, any stockholder who is entitled
to and has perfected his or her appraisal rights will be entitled to receive
upon written request from TL a statement setting forth the aggregate number of
shares with respect to which demands for appraisal have been received and the
aggregate number of holders of such shares. This written statement must be
mailed to the requesting stockholder within 10 days after his or her written
request for such a statement is received by TL as the surviving corporation, or
within 10 days after the expiration of the period for delivery of demands for
appraisals, whichever is later.
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Upon the filing of a petition by a stockholder, service of a copy of such
petition must be made upon TL as the surviving corporation. Within 20 days after
such service, TL must file in the Office of the Register in Chancery in which
the petition was filed a duly verified list containing the names and addresses
of all stockholders who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by TL. If the
petition is originally filed by TL, such petition must be accompanied by such
duly verified list. After the filing of a petition for appraisal, the Register
in Chancery, if ordered by the Court, must give notice of the time and place
fixed for hearing by registered or certified mail to both TL and to the
stockholders shown on the list at the addresses therein stated. This notice must
also be given by one or more publications at least one week before the day of
the hearing in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication must be approved by the Court, and the
costs thereof will be borne by TL.
At the hearing on the petition, the Court will determine the stockholders
who have complied with Section 262 and who have thus become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares to submit to the Register in Chancery their
certificates that formerly represented DDI Common Stock for notation thereon of
the pendency of the appraisal proceedings. If any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to the
stockholder. In such event, such stockholder shall receive the same Merger
Consideration as he or she would have received has such shareholder not demanded
appraisal of his or her shares.
If a petition for an appraisal is timely filed, after a hearing on such
petition the Court will determine the stockholders entitled to appraisal rights
and will appraise the value of the DDI Common Stock owned by such stockholders,
determining the "fair value" thereof exclusive of any element of value arising
from the accomplishment or expectation of the Merger. The Court will direct
payment of the fair value of such shares of DDI Common Stock with a fair rate of
interest, if any, on such fair value to stockholders entitled thereto upon
surrender to TL of stock certificates representing DDI Common Stock. Upon
application of a stockholder, the Court may, in its discretion, order that all
or a portion of the expenses incurred by any stockholder in connection with an
appraisal proceeding, including without limitation, reasonable attorneys' fees
and the fees and expenses of experts, be charged pro rata against the value of
all the shares of DDI Common Stock entitled to appraisal.
No representation is made as to the outcome of the appraisal of fair value
as determined by the Court, and stockholders should recognize that such an
appraisal could result in a determination of a value higher or lower than, or
the same as, the value of the shares of MedQuist Common Stock issued in the
Merger. Moreover, TL reserves the right to assert, in any appraisal proceeding,
that, for purposes of Section 262, the "fair value" of a share of DDI Common
Stock is less than the value of 0.1440899 shares of MedQuist Common Stock issued
in respect thereof in the Merger. In determining the "fair value" of such shares
of DDI Common Stock, the Court is required to take into account all relevant
factors. Therefore, such determination could be based upon a number of
considerations, including the market value of shares of DDI Common Stock and the
asset value and earning capacity of DDI. In Weinberger v. Uop, Inc., et al.
(decided February 1, 1983) the Delaware Supreme Court stated, among other
things, that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court," should be considered in an appraisal proceeding. Section 262 provides
that "fair value" is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger". In Weinberger, the Delaware
Supreme Court held that "elements of future value, including the nature of the
enterprise, which are known or susceptible of proof as of the date of the merger
and not the product of speculation, may be considered."
From and after the Effective Time, no stockholder who has demanded his or
her appraisal rights will be entitled to vote MedQuist Common Stock to which the
stockholder would have been entitled had he or she chosen not to exercise
appraisal rights, nor will he or she be entitled to payments of dividends or
other distributions on the stock (except dividends or other distributions
payable to DDI stockholders of record on a date that is prior to the Effective
Time); provided, however, that if no petition for an appraisal has been filed
within the time provided by Delaware law, or if such stockholder delivers to TL
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a written withdrawal of his or her demand for an appraisal and an acceptance of
the Merger, either within 60 days after the Effective Time or thereafter with
written approval of TL (which TL reserves the right to give or withhold in its
discretion), then the right of such stockholder to an appraisal will cease, and
(upon surrender of certificates formerly representing DDI Common Stock together
with a properly completed Letter of Transmittal) such stockholder will receive
the shares of MedQuist Common Stock into which such shares of DDI Common Stock
were converted in the Merger. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery will be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
whatever terms the Court deems just.
41
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information combines the
historical statements of operations of MedQuist and DDI (the "Combined Company")
after giving effect to the Merger, as if the Merger had occurred on January 1,
1995, and the historical balance sheets of the Combined Company as if the
Merger had occurred on March 31, 1998, in each case using the "pooling of
interests" method of accounting. The following unaudited pro forma information
should be read in conjunction with the historical financial statements of each
of MedQuist and DDI.
The pro forma amounts are presented for informational purposes only and are not
necessarily indicative of the results of operations of the combined company that
would have actually occurred had the Merger been consummated as of January 1,
1995 or of the financial condition of the combined company had the Merger been
consummated as of March 31, 1998 or of the future results of operations or
financial condition of the combined company. The pro forma information does not
reflect any synergies anticipated as a result of the Merger, in particular the
elimination of costs associated with DDI's status as a public company and other
administrative savings. There can be no assurances that such synergies will be
realized. In addition, the pro forma statement of operations data does not
reflect transaction costs related to the Merger and the pro forma information
does not reflect other costs associated with combining the companies, if any,
which cannot currently be estimated.
The Combined Company
Unaudited Pro Forma Combined Statement of Operations
For The Three Months Ended March 31, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
--------------------------
MedQuist DDI Adjustments Combined
------- ------- ----------- --------
<S> <C> <C> <C> <C>
Revenues $27,396 $ 2,997 $ -- $30,393
Cost and expenses:
Cost of revenues 20,211 1,961 590 (a) 22,762
Selling, general and administrative 1,357 716 (716)(a) 1,357
Depreciation 1,075 -- 126 (a) 1,201
Amortization 440 -- -- 440
------- ------- ----------- -------
Total operating expenses 23,083 2,677 -- 25,760
------- ------- ----------- -------
Operating income 4,313 320 -- 4,633
Interest expense 14 -- -- 14
------- ------- ----------- -------
Income before income taxes 4,299 320 -- 4,619
Income tax provision 1,655 123 -- 1,778
------- ------- ----------- -------
Net income $ 2,644 $ 197 $ -- $ 2,841
======= ======= =========== =======
Net income per share:
Basic $ 0.12 $ 0.13
Diluted
0.12 0.12
Weighted average shares outstanding:
Basic 21,742 906 (b) 22,648
Diluted 22,970 986 (b) 23,956
</TABLE>
- ----------
(a) Represents reclassifications to conform DDI's selling, general and
administrative expenses to MedQuist's financial reporting presentation.
42
<PAGE>
(b) Represents the DDI weighted average shares outstanding for the period
adjusted for the Exchange Ratio of 0.1440899
43
<PAGE>
The Combined Company
Unaudited Pro Forma Combined Statement of Operations
For The Three Months Ended March 31, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
--------------------------
MedQuist DDI Adjustments Combined
------- ------- ----------- --------
<S> <C> <C> <C> <C>
Revenues $18,621 $ 1,994 $ -- $20,615
Cost and expenses:
Cost of revenues 13,714 1,275 450 (a) 15,439
Selling, general and administrative 1,059 524 (524)(a) 1,059
Depreciation 754 -- 74 (a) 828
Amortization 350 -- -- 350
------- ------- ----------- --------
Total operating expenses 15,877 1,799 -- 17,676
------- ------- ----------- --------
Operating income 2,744 195 -- 2,939
Interest expense 63 4 -- 67
------- ------- ----------- --------
Income taxes 2,681 191 -- 2,872
Income tax provision 1,046 72 -- 1,118
------- ------- ----------- --------
Net Income $ 1,635 $ 119 $ -- $ 1,754
======= ======= =========== ========
Net income per share:
Basic $ 0.08 $ 0.08
Diluted
0.07 0.08
Weighted average shares outstanding:
Basic 20,680 902 (b) 21,582
Diluted 22,262 902 (b) 23,164
</TABLE>
- ----------
(a) Represents reclassifications to conform DDI's selling, general and
administrative expenses to MedQuist's financial reporting presentation.
(b) Represents the DDI weighted average shares outstanding for the period
adjusted for the Exchange Ratio of 0.1440899
44
<PAGE>
The Combined Company
Unaudited Pro Forma Combined Statement of Operations
For The Year Ended December 31, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
----------------------
MedQuist DDI Adjustments Combined
------- ------- ----------- --------
<S> <C> <C> <C> <C>
Revenues $84,590 $10,026 $ -- $94,616
Cost and expenses:
Cost of revenues 62,282 6,398 2,226 (a) 70,906
Selling, general and administrative 4,620 2,598 (2,598)(a) 4,620
Depreciation 3,568 -- 372 (a) 3,940
Amortization 1,517 -- -- 1,517
------- ------- ----------- -------
Total operating expenses 71,987 8,996 -- 80,983
------- ------- ----------- -------
Operating income 12,603 1,030 -- 13,633
Interest expense 173 21 -- 194
------- ------- ----------- -------
Income before income taxes 12,430 1,009 -- 13,439
Income tax provision 4,799 393 -- 5,192
------- ------- ----------- -------
Net income $7,631 $ 616 $ -- $ 8,247
======= ======= =========== =======
Net income per share:
Basic $ 0.36 -- -- $ 0.38
Diluted
0.34 -- -- 0.35
Weighted average shares outstanding:
Basic 21,680 -- 902 (b) 21,908
Diluted 22,556 -- 984 (b) 23,540
</TABLE>
- ----------
(a) Represents reclassifications to conform DDI's selling, general and
administrative expenses to MedQuist's financial reporting presentation.
(b) Represents the DDI weighted average shares outstanding for the period
adjusted for the Exchange Ratio of 0.1440899
45
<PAGE>
The Combined Company
Unaudited Pro Forma Combined Statement of Operations
For The Year Ended December 31, 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
--------------------------------
MedQuist DDI Adjustments Combined
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenues $ 61,480 $ 6,937 $ -- $ 68,417
Cost and expenses:
Cost of revenues 45,591 4,490 1,435 (a) 51,516
Selling, general and administrative 3,579 1,717 (1,717)(a) 3,579
Depreciation 2,468 -- 282 (a) 2,750
Amortization 1,176 -- -- 1,176
-------- -------- -------- --------
Total operating expenses 52,814 6,207 -- 59,021
-------- -------- -------- --------
Operating income 8,666 730 -- 9,396
-------- -------- -------- --------
Interest expense 1,649 37 -- 1,686
-------- -------- -------- --------
Income before income taxes 7,017 693 -- 7,710
Income tax provision 2,833 253 -- 3,086
-------- -------- -------- --------
Net income (c) $ 4,184 $ 440 $ -- $ 4,624
======== ======== ======== ========
Net income per share (c):
Basic $ 0.26 $ 0.27
Diluted 0.23 0.24
Weighted average shares outstanding:
Basic 16,114 902 (b) 17,016
Diluted 18,006 902 (b) 18,908
</TABLE>
- -----------------------------------------------------------------
(a) Represents reclassifications to conform DDI's selling, general and
administrative expenses to MedQuist's financial reporting presentation.
(b) Represents the DDI weighted average shares outstanding for the period
adjusted for the Exchange Ratio of 0.1440899
(c) Net income and net income per share does not include a $707 non-recurring
deduction from net income available to common shareholders related to the
issuance of 128 shares of MedQuist common stock to induce a warrant holder
to exercise. See Note 8 of Notes to Consolidated Financial Statements of
MedQuist.
46
<PAGE>
The Combined Company
Unaudited Pro Forma Combined Statement of Operations
For The Year Ended December 31, 1995
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
----------------------------
MedQuist DDI Adjustments Combined
-------- ------- ----------- -------
<S> <C> <C> <C> <C>
Revenues $45,127 $ 5,058 $ -- $50,185
Cost and expenses:
Cost of revenues 33,711 3,443 1,036 (a) 38,190
Selling, general and administrative 4,325 1,284 (1,284)(a) 4,325
Depreciation 1,862 -- 248 (a) 2,110
Amortization 496 -- -- 496
------- ------- ------- -------
Total operating expenses
40,394 4,727 -- 45,121
------- ------- ------- -------
Operating income 4,733 331 -- 5,064
Interest expense
3,695 25 -- 3,720
------- ------- ------- -------
Income before income taxes 1,038 306 -- 1,344
Income tax provision 431 202 -- 633
------- ------- ------- -------
Income from continuing operations (c) $ 607 $ 104 $ -- $ 711
======= ======= ======= =======
Income from continuing operations per share (c):
Basic $ 0.09 $ 0.09
Diluted
0.08 0.08
Weighted average shares outstanding:
Basic 6,970 902 (b) 7,872
Diluted 7,522 902 (b) 8,424
</TABLE>
- -------------------------------------------
(a) Represents reclassifications to conform DDI's selling, general and
administrative expenses to MedQuist's financial reporting presentation.
(b) Represents the DDI weighted average shares outstanding for the period
adjusted for the Exchange Ratio of 0.1440899.
(c) On November 14, 1995, MedQuist executed a letter of intent to sell its
receivables management business, which was accounted for as a discontinued
operation. Income from continuing operations excludes a net loss from
discontinued operations of $1,729. See Note 3 of Notes to Consolidated
Financial Statements of MedQuist.
47
<PAGE>
The Combined Company
Unaudited Pro Forma Combined Balance Sheet
March 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Pro Forma
---------------------------
MedQuist DDI Adjustments Combined
-------- -------- ----------- --------
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 13,609 $ 171 $ -- $ 13,780
Accounts receivable, net 19,770 1,481 -- 21,251
Prepaid expenses and other 839 56 -- 895
-------- -------- -------- --------
Total current assets 34,218 1,708 -- 35,926
Property and equipment, net 10,024 1,863 -- 11,887
Intangible assets, net 48,132 -- -- 48,132
Other assets 545 -- -- 545
-------- -------- -------- --------
92,919 3,571 -- 96,490
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 429 $ 235 $ -- $ 664
Accounts payable 1,073 399 -- 1,472
Accrued payroll 3,813 419 -- 4,232
Accrued expenses ` 3,427 269 750(a) 4,446
-------- -------- -------- --------
Total current liabilities 8,742 1,322 750 10,814
Long-term debt 52 -- -- 52
Other liabilities 520 -- -- 520
Deferred income taxes 2,282 290 -- 2,572
Shareholders' equity:
Common stock -- 63 (63)(b) --
Additional paid-in capital 61,790 673 63 (b) 62,526
Retained earnings 19,533 1,223 (750)(a) 20,006
-------- -------- -------- --------
Total shareholders' equity 81,323 1,959 (750) 82,532
-------- -------- -------- --------
$ 92,919 $ 3,571 $ -- $ 96,490
======== ======== ======== ========
</TABLE>
- -----------------------------------------------------------------
(a) To record accrued expenses associated with the Merger relating to the
estimated merger and transaction costs.
(b) Represents the exchange of DDI common stock for MedQuist no par common stock
and the elimination of the DDI common stock.
48
<PAGE>
COMPARISON OF SHAREHOLDERS' RIGHTS
The rights of MedQuist stockholders are governed by MedQuist's Amended and
Restated Certificate of Incorporation (the "MedQuist Certificate of
Incorporation"), its By-laws (the "MedQuist By-laws") and the NJBCA. The rights
of DDI stockholders are governed by the DDI Amended and Restated Certificate of
Incorporation (the "DDI Certificate of Incorporation"), the DDI Amended and
Restated By-laws (the "DDI By-laws") and the DGCL. After the Effective Time, the
rights of DDI stockholders who become MedQuist stockholders will be governed by
the MedQuist Certificate of Incorporation, the MedQuist By-laws and the NJBCA.
The following is a summary of the material differences between the rights
of MedQuist stockholders and the rights of DDI stockholders. This summary is not
intended to be complete and is qualified in its entirety by reference to
applicable provisions of the NJBCA and the DGCL and to the Certificate of
Incorporation and By-laws of each of MedQuist and DDI.
Size and Classification of the Board of Directors
MedQuist. The MedQuist Certificate of Incorporation provides that the total
number of MedQuist directors shall be not less than five nor more than twenty as
determined by the MedQuist Board from time to time. MedQuist currently has ten
directors. The MedQuist Board is divided into three classes as nearly equal in
number as possible. Directors of each class serve for a term of three years and
until their successors have been elected and qualified. Persons nominated to
fill the vacancy of those Directors of the class whose term expires at the time
of an annual meeting of stockholders are proposed for election at such annual
meeting to serve until the expiration of their term.
DDI. The DDI Certificate of Incorporation provides that the number of
directors which constitutes the whole DDI Board shall be designated in the DDI
By-laws. The DDI By-laws currently provide that the DDI Board shall consist of
not fewer than one nor more than eight members. Prior to the execution of the
Merger Agreement, there were four directors of DDI. Directors are elected at
each annual meeting of stockholders to hold office until such director's
successor is elected and qualified or until the director's earlier resignation
or removal.
Removal of Directors
MedQuist. The NJBCA provides that directors of MedQuist may be removed,
with cause, by a majority vote of the stockholders entitled to vote thereon.
DDI. The DGCL provides that directors of DDI generally may be removed, with
or without cause, by the holders of a majority of the shares of DDI then
entitled to vote at an election of directors.
Special Meeting of Stockholders; Action by Written Consent
MedQuist. Under the MedQuist By-laws, a special meeting of the stockholders
may be called at any time by the Chairman of the MedQuist Board, by the
President or by a majority of the directors of the MedQuist Board and may be
held on such business day and at such time and at such place within or without
the State of New Jersey as is stated in the notice of the meeting.
Pursuant to the NJBCA, any action required or permitted to be taken at
a meeting of the MedQuist stockholders generally may be taken without a meeting
if all the stockholders entitled to vote thereon consent thereto in writing.
DDI. Under the DDI By-laws, a special meeting of stockholders may be called
for any purpose or purposes by the DDI Board, by the Chairperson of the DDI
Board or by the President.
Pursuant to the DDI By-laws, any action required or permitted to be taken
at a stockholders' meeting may be taken without a meeting if the action is taken
by persons who would be entitled to vote at a meeting and who hold shares having
49
<PAGE>
voting power to cast not less than the minimum number of votes that would be
necessary to authorize or take the action at a meeting at which all stockholders
entitled to vote were present and voted.
Stockholder Inspection Rights; Stockholder Lists
MedQuist. Pursuant to the NJBCA, a stockholder who has been a stockholder
for at least six months or who holds, or is authorized in writing by holders of,
at least five percent of the outstanding shares of any class or series of stock
of MedQuist upon at least five days' written demand has the right for any proper
purpose to inspect in person or by agent or attorney the minutes of the
proceedings of MedQuist's stockholders and MedQuist's record of stockholders.
Irrespective of the period such stockholder has held his or her stock or the
amount of stock such stockholder holds, a court is empowered, upon proof of
proper purpose, to compel production for examination by the stockholder of the
books and records of account, minutes and record of stockholders of MedQuist.
DDI. Pursuant to the DDI By-laws, any stockholder, in person or by attorney
or other agent, may, upon written demand given under oath and stating the
purpose thereof, inspect for any proper purpose DDI's stock ledger, a list of
its stockholders and its other books and records. A proper purpose is a purpose
reasonably related to such person's interest as a stockholder. A list of
stockholders is to be open to the examination of any stockholder, for any
purpose germane to a meeting of stockholders, for a period of at least 10 days
prior to such meeting. The list is also to be produced and kept at the place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
Amendment of Governing Documents
MedQuist. Under the NJBCA, a proposed amendment to a corporation's
certificate of incorporation requires approval by the board of directors and an
affirmative vote of a majority of the votes cast by the holders of shares
entitled to vote thereof, unless a specific provision of the NJBCA or the
certificate of incorporation provides otherwise.
Pursuant to the NJBCA, the MedQuist Certificate of Incorporation and the
MedQuist By-laws, the provisions of the MedQuist By-laws generally may be
amended, added to, altered, changed or repealed in whole or in part (i) by the
vote of the stockholders at a regular or special meeting of the stockholders or
(ii) by the MedQuist Board at a regular or special meeting of the MedQuist
Board, if notice of the proposed amendment is contained in the notice of such
meeting, except that a By-law adopted or amended by the MedQuist Board may be
superseded by stockholder action and such stockholder action may preempt any
further action by the MedQuist Board.
DDI. Pursuant to the DGCL, a proposed amendment to a corporation's
certificate of incorporation requires a resolution adopted by the board of
directors and, unless otherwise provided in the certificate of incorporation,
the affirmative vote of the holders of a majority of the outstanding stock
entitled to vote thereon and the affirmative vote of the holders of a majority
of the outstanding stock of each class entitled to vote thereon as a class. If
any such amendment would adversely affect the rights of any holders of shares of
a class or series, the vote of the holders of a majority of all outstanding
shares of such class or series, voting as a class, is also necessary to
authorize such amendment.
The DGCL provides that a corporation's by-laws may be adopted, amended or
repealed by the stockholders, and if authorized in the corporation's certificate
of incorporation or by-laws, by such corporation's Board of Directors. The DDI
Certificate of Incorporation provides that the DDI Board may adopt, amend or
repeal the DDI By-laws.
Corporation's Best Interest
MedQuist. Under the NJBCA, the director of a New Jersey corporation, in
discharging his or her duties to the corporation and in determining what he or
she reasonably believes to be is the best interest of the corporation may
consider any of the following (in addition to the effects of any action on
stockholders): (i) the effects of the action on the corporation's employees,
suppliers, creditors and customers, (ii) the effects of the action on the
community in which the corporation operates and (iii) the long-term as well as
the short-term interests of the corporation and its stockholders, including the
50
<PAGE>
possibility that these interests may best be served by the continued
independence of the corporation. If, on the basis of the foregoing factors, the
Board of Directors determines that any proposal or offer to acquire the
corporation is not in the best interest of the corporation, it may reject such
proposal or offer, in which event the Board of Directors will have no obligation
to facilitate, remove any obstacles to, or refrain from impeding such proposal
or offer.
DDI. The DGCL does not include a comparable provision.
Required Vote for Authorization of Certain Actions
MedQuist. Under the NJBCA, the consummation of a merger or consolidation of
a New Jersey corporation requires the approval of such corporation's Board of
Directors and the affirmative vote of a majority of the votes cast by the
holders of shares of the corporation entitled to vote thereon, unless such
corporation is the surviving corporation and (i) such corporation's certificate
of incorporation is not amended; (ii) the stockholders of the surviving
corporation whose shares were outstanding immediately before the effective date
of the merger will hold the same number of shares, with identical designations,
preferences, limitations, and rights, immediately after; and (iii) the number of
voting shares and participation shares outstanding after the merger will not
exceed by 40% the total number of voting or participating shares of the
surviving corporation before the merger. Similarly a sale of all or
substantially all of a New Jersey corporation's assets other than in the
ordinary course of business, or a voluntary dissolution of a New Jersey
corporation, requires the approval of such corporation's Board of Directors and
the affirmative vote of a majority of the votes cast by the holders of shares of
the corporation entitled to vote thereon. Furthermore, the MedQuist Certificate
of Incorporation contains provisions requiring the approval of at least 80% of
the combined voting power of outstanding voting stock, voting together as a
single class, to approve certain business combinations and transactions
involving any five percent stockholder.
DDI. The DGCL requires the affirmative vote of a majority of the Board of
Directors of a Delaware corporation and at least a majority of such
corporation's outstanding shares entitled to vote thereon to authorize a merger
or consolidation, unless (i) such corporation is the surviving corporation, (ii)
such corporation's certificate of incorporation is not amended, (iii) each share
of stock of such corporation outstanding immediately prior to the effective date
of the merger is to be an identical outstanding share of such corporation after
the effective date of the merger and (iv) either no shares of common stock of
such corporation and no shares, securities or obligations convertible into such
stock are to be issued or delivered under the plan of merger, or the authorized
unissued shares or the treasury shares of common stock of such corporation to be
issued or delivered under the plan of merger plus those initially issuable upon
conversion of any other shares, securities or obligations to be issued or
delivered under such plan, do not exceed 20% of the shares of common stock of
such corporation outstanding immediately prior to the effective date of the
merger. A sale of all or substantially all of a Delaware corporation's assets or
a voluntary dissolution of a Delaware corporation requires the affirmative vote
of a majority of the Board of Directors and at least a majority of such
corporation outstanding shares entitled to vote thereon.
Business Combinations
MedQuist. The NJBCA provides that no corporation organized under the laws
of New Jersey with its principal executive offices or significant operations
located in New Jersey (a "resident domestic corporation") may engage in any
"business combination" (as defined in the NJBCA) with any interested stockholder
(generally, a 10% or greater stockholder) of such corporation for a period of
five years following such interested stockholder's stock acquisition, unless
such business combination is approved by the Board of Directors of such
corporation prior to the stock acquisition. A resident domestic corporation,
such as MedQuist, cannot opt out of the foregoing provisions of the NJBCA.
In addition, no resident domestic corporation may engage, at any time, in
any business combination with any interested stockholder of such corporation
other than: (i) a business combination approved by the Board of Directors of
such corporation prior to the stock acquisition, (ii) a business combination
approved by the affirmative vote of the holders of two-thirds of the voting
stock not beneficially owned by such interested stockholder at a meeting called
51
<PAGE>
for such purpose or (iii) a business combination in which the interested
stockholder pays a formula price designed to ensure that all other stockholders
receive at least the highest price per share paid by such interested
stockholder. In connection with business combinations with any five percent
stockholder, the MedQuist Certificate of Incorporation contains provisions
requiring the approval of at least 80% of the holders of the MedQuist Common
Stock entitled to vote in the election of directors and compliance with certain
procedural requirements.
DDI. In general, Section 203 of the DGCL prohibits an interested
stockholder (generally, a 15% or greater stockholder) of a Delaware corporation
from engaging in a "business combination" (as defined in the DGCL) with such
corporation for three years following the date such person became an interested
stockholder.
The provision is not applicable when (i) prior to the date the stockholder
became an interested stockholder, the Board of Directors of the corporation
approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder, (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
such interested stockholder owned at least 85% of the outstanding voting stock
of the corporation, not including shares owned by directors who are also
officers and by certain employee stock plans or (iii) on or subsequent to the
date that stockholder becomes an interested stockholder, the business
combination is approved by the Board of Directors of the corporation and
authorized at a meeting of stockholders, and not by written consent, by the
affirmative vote of the holders of at least two-thirds of the outstanding voting
stock entitled to vote thereon, excluding shares owned by the interested
stockholder.
The restrictions of Section 203 generally do not apply to (i) corporations
that do not have a class of voting stock that is listed on a national securities
exchange, authorized for quotation on The NASDAQ Stock Market or held of record
by more than 2,000 stockholders or (ii) business combinations with an interested
stockholder that are proposed subsequent to the public announcement of, and
prior to the consummation or abandonment of, certain mergers, sales of a
majority of a corporation's assets or tender offers for 50% or more of a
corporation voting stock.
The DGCL allows corporations to elect not to be subject to the
provisions of the DGCL. DDI has not made such an election.
52
<PAGE>
MANAGEMENT OF MEDQUIST AND TL UPON CONSUMMATION OF THE MERGER
The directors and executive officers of MedQuist and TL have continued as
the directors and executive officers of MedQuist and TL, respectively, after the
Merger. For information with respect to the directors and executive officers of
MedQuist, see Items 10 - 13 of MedQuist's Annual Report (which incorporates
portions of MedQuist's proxy statement dated April 24, 1998), which is
incorporated herein by reference.
PLAN OF DISTRIBUTION OF ADDITIONAL SHARES
MedQuist may issue the Additional Shares of Common Stock covered by this
Prospectus from time to time in connection with merger or acquisition
transactions entered into by MedQuist. It is expected that the terms of such
transactions will be determined by direct negotiations with the owners or
controlling persons of the businesses, assets or securities to be acquired by
MedQuist, and that the shares of MedQuist Common Stock so issued will be valued
at prices reasonably related to market prices current either at the time a
merger or acquisition is agreed upon or at or about the time of delivery of
shares. No underwriting discounts or commissions will be paid, although finder's
fees may be paid from time to time with respect to specific mergers or
acquisitions. Any person receiving such fees may be deemed to be an Underwriter
within the meaning of the Securities Act.
LEGAL MATTERS
Although MedQuist from time to time in the course of the operation of its
business is subject to various legal proceedings, MedQuist is not currently a
party to any material pending legal proceeding nor, to the knowledge of
MedQuist, is any material legal proceeding currently threatened.
The validity of the shares of MedQuist Common Stock offered hereby will be
passed upon for MedQuist by Pepper Hamilton LLP.
EXPERTS
The consolidated audited financial statements of MedQuist incorporated by
reference in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are incorporated by reference in reliance upon the authority of
said firm as experts in giving said reports.
The audited financial statements of DDI included in this Prospectus have
been audited by Hozik & Charin, independent accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
53
<PAGE>
INDEX TO DDI FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
1. DDI unaudited condensed financial statements as of March 31, 1998. F-2
2. DDI Audited Financial Statements for the years ended December 31, 1997 and 1996. F-21
</TABLE>
F-1
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
---------- -----------
<S> <C> <C>
Current Assets
Cash and equivalents $ 171,140 $ 2,530
Accounts receivable 1,481,326 1,709,503
Employee receivables 13,626 7,605
Prepaid expenses and other 41,998 22,898
---------- ----------
Total current assets 1,708,090 1,742,536
---------- ----------
Property and equipment, net 1,863,093 1,546,079
---------- ----------
Total assets $3,571,183 $3,288,615
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Borrowings under line of credit $ 214,000 $ 132,318
Accounts payable 398,830 313,113
Accrued payroll and payroll taxes 418,784 325,894
Current portion of long-term debt 5,543 6,547
Current potion of capital lease obligations 15,395 24,314
Current income taxes payable 228,050 405,575
Current deferred income taxes 41,000 41,000
---------- ----------
Total current liabilities 1,321,602 1,248,761
---------- ----------
Long-term debt, non-current portion -- 576
Non-current deferred income taxes 290,000 339,000
Stockholders' equity
Common stock, par value $0.01 per share, 20,000,000
Authorized, 6,325,503 shares issued and outstanding
at March 31, 1998 63,255 62,816
Additional paid-in capital 672,915 610,900
Retained earnings 1,223,411 1,026,562
---------- ----------
Total stockholders' equity 1,959,581 1,700,278
---------- ----------
Commitments - Note 8 -- --
---------- ----------
Total liabilities and stockholders' equity $3,571,183 $3,288,615
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Revenues $ 2,996,787 $ 1,994,391
Cost of services 1,960,296 1,275,589
----------- -----------
Gross profit 1,036,491 718,802
General and administrative expenses 716,019 524,128
----------- -----------
Operating income 320,472 194,674
Other income (expense)
Interest and other income 3,415 958
Interest expense (4,038) (4,507)
----------- -----------
Income before income taxes 319,849 191,125
Provision for income taxes 123,000 72,000
----------- -----------
Net income $ 196,849 $ 119,125
=========== ===========
Basic net income per share $ .03 $ .02
=========== ===========
Weighted average shares outstanding 6,289,401 6,257,480
=========== ===========
Diluted net income per share $ .03 $ .02
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
DIGITAL DICTATION, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income $ 196,849 $ 119,125
Changes to operations not affecting cash
Depreciation and amortization 126,466 74,210
Deferred income tax provision (49,000) --
Changes in operating assets and liabilities
Accounts receivable 228,177 148,631
Employee receivables (6,021) 1,372
Prepaid expenses and other (19,100) (11,762)
Accounts payable 85,719 127,494
Accrued payroll and payroll taxes 92,890 189,707
Current income taxes payable (177,525) (10,000)
--------- ---------
Net cash provided by operating activities 478,455 638,777
--------- ---------
Cash flows from investing activities
Additions to property and equipment (443,480) (156,953)
--------- ---------
Net cash from investing activities (443,480) (156,953)
--------- ---------
Cash flows from financing activities
Net (decrease) in borrowing under line of credit 81,682 (329,029)
Issue of common stock - Employee Stock Purchase Plan 39,932 --
Issue of common stock - exercise of stock options 22,522 --
Increase (reduction) of long-term debt (1,582) 31,905
Reduction of capital lease obligations (8,919) (3,649)
--------- ---------
Net cash used by financing activities 133,635 (300,773)
--------- ---------
Increase in cash 168,610 181,051
Cash and cash equivalents at beginning of period 2,530 88,815
--------- ---------
Cash and cash equivalents at end of period
$ 171,140 $ 269,866
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
DIGITAL DICTATION, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - The Company
- --------------------
Digital Dictation, Inc. (the "Company" or "DDI") provides transcription
services for various medical facilities. The Company is incorporated in the
State of Delaware and commenced operations during 1989.
Note 2 - Presentation of Financial Statements
- ---------------------------------------------
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, these financial statements do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. For further information,
reference is made to the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997.
Note 3 - Property and Equipment
- -------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1997 1997
----------- -----------
<S> <C> <C>
Dictation and other equipment $ 2,798,267 $ 2,480,673
Furniture and fixtures 96,280 94,157
Leasehold improvements 67,146 64,671
Automobile 23,400 23,400
Software 377,269 255,981
----------- -----------
Total Property Assets 3,362,362 2,918,882
Accumulated depreciation and amortization (1,499,269) (1,372,803)
----------- -----------
$ 1,863,093 $ 1,546,079
=========== ===========
</TABLE>
Note 4 - Borrowings under Line of Credit
- ----------------------------------------
The Company has a $700,000 line of credit available from Crestar Bank
subject to annual reviews and expires December 3, 2002. Interest is payable at
prime plus one per cent per annum (9.5% at March 31, 1998). The line of credit
is secured by all assets of the Company. There were borrowings of $214,000 under
this line of credit at March 31, 1998.
Borrowings under this line of credit are solely for working capital
purposes. The related loan and security agreement requires the Company to submit
annual reviewed financial statements within 120 days after the end of each
fiscal year, and unaudited interim financial statements within 20 days after the
end of each fiscal quarter. The Company is in compliance with these reporting
covenants.
F-5
<PAGE>
Note 5 - Long-term Debt
- -----------------------
March 31, December 31,
1998 1997
------- -------
Automobile installment loan, 10% interest,
due December 1998 $ 5,543 $ 7,123
------- -------
5,543 7,123
Less current portion (5,543) (6,547)
------- -------
$ -- $ 576
======= =======
Note 6 - Capital Leases
The Company leases various equipment under long-term contracts. Property
and equipment includes the following amounts for leases that have been
capitalized:
March 31, December 31,
1998 1997
--------- ---------
Dictation and other equipment $ 104,515 $ 104,515
Allowance for depreciation (63,430) (58,204)
--------- ---------
$ 41,085 $ 46,311
========= =========
Note 7 - Stock Option Plans
- ---------------------------
In March 1996 the Board of Directors authorized the establishment of a
non-qualified stock option plan for its directors, full-time employees and
consultants (the "Plan") and reserved 1,300,000 shares of the Company's common
stock for issuance upon the exercise of options granted under this plan. In
September, 1997, the Board of Directors approved reserving an additional 300,000
shares of the Company's common stock for issuance upon the exercise of options
granted under this Plan. All options granted to date under the Plan are granted
at fair market value as of the date of the grant, and have a maximum term of ten
years.
Note 8 - Commitments
- --------------------
The Company rents office space under two agreements which expire August 31, 1999
F-6
<PAGE>
and October 31, 1999.
Future minimum lease payments under capital leases for equipment and
non-cancelable operating leases for office space, equipment and an automobile as
of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending Capital Operating
March 31, Leases Leases Total
--------- ------------- ------------ -------------
<S> <C> <C> <C>
1999 $ 15,995 $ 97,479 $ 113,474
2000 42,967 42,967
------------- ------------ -------------
Total minimum lease payments 15,995 $ 140,446 $ 156,441
============ =============
Amount representing interest (600)
-------------
Present value of net minimum lease payments $ 15,395
=============
</TABLE>
Rent expense under operating leases for the three months ended March 31,
1998 and 1997 totaled $24,967 and $23,921, respectively.
F-7
<PAGE>
DIGITAL DICTATION, INC.
AUDITED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Digital Dictation, Inc.
Vienna, Virginia
We have audited the accompanying balance sheets of Digital Dictation, Inc.
as of December 31, 1997 and 1996, and the related statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Digital Dictation, Inc. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
McLean, Virginia
January 26, 1998
F-9
<PAGE>
DIGITAL DICTATION, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
ASSETS - Note 5 1997 1996
---------- ----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,530 $ 88,815
Accounts receivable (net of $40,000 allowance for doubtful
accounts at December 31, 1997) - Note 3 1,709,503 1,156,841
Employee receivables 7,605 2,762
Prepaid expenses and other 22,898 28,702
---------- ----------
Total current assets 1,742,536 1,277,120
Property and equipment, net - Notes 4 and 8 1,546,079 879,983
---------- ----------
Total assets $3,288,615 $2,157,103
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Borrowings under line of credit - Note 5 $ 132,318 $ 329,029
Accounts payable 313,113 151,485
Accrued payroll and payroll taxes 325,894 115,060
Current income taxes payable - Note 6 405,575 27,000
Current portion of long-term debt - Note 7 6,547 5,931
Current portion of capital lease obligations - Notes 8 and 14 24,314 33,218
Current deferred income taxes - Note 6 41,000 351,000
---------- ----------
Total current liabilities 1,248,761 1,012,723
Long-term debt, non current portion - Note 7 576 7,127
Capital lease obligations, non current portion - Notes 8 and 14 23,846
Non current deferred income taxes - Note 6 339,000 69,000
Commitments - Note 14
Stockholders' equity
Common stock, par value $.01 per share, 20,000,000 shares authorized,
6,281,612 and 6,257,480 shares issued and
outstanding at December 31, 1997 and 1996, respectively 62,816 62,575
Additional paid-in capital 610,900 571,496
Retained earnings 1,026,562 410,336
---------- ----------
Total stockholders' equity 1,700,278 1,044,407
---------- ----------
Total liabilities and stockholders' equity $3,288,615 $2,157,103
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
DIGITAL DICTATION, INC.
STATEMENTS OF INCOME
Years ended December 31,
-------------------------------
1997 1996
------------ ------------
Revenues $ 10,025,895 $ 6,936,730
Cost of services 6,398,276 4,490,239
------------ ------------
Gross profit 3,627,619 2,446,491
General and administrative expenses 2,598,116 1,716,691
------------ ------------
Operating income 1,029,503 729,800
Other income (expense)
Interest and other income 2,892 2,054
Interest expense (23,169) (39,187)
------------ ------------
(20,277) (37,133)
------------ ------------
Income before income taxes 1,009,226 692,667
Income taxes - Note 6 393,000 253,000
------------ ------------
Net income $ 616,226 $ 439,667
============ ============
Basic earnings per share - Note 13 $ .10 $ .07
============ ============
Diluted earnings per share - Note 13 $ .09 $ .07
============ ============
See accompanying notes to financial statements.
F-11
<PAGE>
DIGITAL DICTATION, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996 and 1997
<TABLE>
<CAPTION>
Additional Retained Total
Common Paid-in Earnings Stockholders'
Stock Capital (deficit) Equity
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ 62,575 $ 571,496 $ (29,331) $ 604,740
Net income 439,667 439,667
----------- ----------- ----------- -----------
Balance at December 31, 1996 62,575 571,496 410,336 1,044,407
Issue of Common Stock - Employee
Stock Purchase Plan (18,733 shares) 187 31,659 31,846
Issue of Common Stock upon
exercise of Stock Options
(5,399 shares) 54 7,745 7,799
Net income 616,226 616,226
----------- ----------- ----------- -----------
Balance at December 31, 1997 $ 62,816 $ 610,900 $ 1,026,562 $ 1,700,278
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
DIGITAL DICTATION, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 616,226 $ 439,667
Charges to operations not affecting cash:
Depreciation and amortization 371,209 282,132
Provision for doubtful accounts 40,000
Net deferred income tax provision (40,000) 218,000
Changes in operating assets and liabilities:
Accounts receivable (592,662) (442,635)
Employee receivables (4,843) 20,262
Prepaid expenses and other 5,804 (4,122)
Accounts payable 161,628 (60,858)
Accrued payroll and payroll taxes 210,834 (14,040)
Current income taxes payable 378,575 27,000
----------- -----------
Net cash provided by operating activities 1,146,771 465,406
----------- -----------
Cash flows from investing activities
Additions to property and equipment (1,037,305) (316,486)
----------- -----------
Net cash used by investing activities (1,037,305) (316,486)
----------- -----------
Cash flows from financing activities
Borrowings under line of credit (196,711) 64,282
Proceeds from long-term debt 18,000
Issue of Common Stock - Employee Stock Purchase Plan 31,846
Issue of Common Stock -- Stock Option Plan 7,799
Dividends paid to former stockholder (44,791)
Principal payments on long-term debt (5,935) (61,332)
Principal payments on capital lease obligations (32,750) (68,798)
----------- -----------
Net cash used by financing activities (195,751) (92,639)
----------- -----------
Increase (decrease) in cash and cash equivalents (86,285) 56,281
Cash and cash equivalents at beginning of year 88,815 32,534
----------- -----------
Cash and cash equivalents at end of year $ 2,530 $ 88,815
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
DIGITAL DICTATION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - ORGANIZATION
Digital Dictation, Inc. (the "Company" or "DDI") provides transcription
services for various medical facilities. The Company is incorporated in the
state of Delaware and commenced operations during 1989.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Revenue Recognition: Revenue for transcription services is recognized when
the services are provided.
Property and Equipment: Property and equipment is stated at cost or, in the
case of equipment acquired under capital leases, at the present value of future
lease payments, less accumulated depreciation and amortization. Internally
developed software costs of $170,596 incurred in 1997 have been capitalized in
accordance with an AICPA exposure draft dated December 17, 1996 of a Statement
of Position, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." These costs include $141,989 of salaries and fringe
benefits for software developers and $28,607 of telecommunications and outside
consultant costs. Repair and maintenance expenditures are charged to operations
in the period incurred. Depreciation is computed under the straight line method
for financial reporting purposes and accelerated methods for income tax
purposes. Equipment, furniture, fixtures, automobile, and leasehold improvements
are depreciated over five to seven years. Purchased software is amortized using
the straight line method over five years. Internally developed software will be
amortized over five years when the system is placed in operation.
Income Taxes: The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Cash and Cash Equivalents: The Company considers all highly liquid
securities purchased with a maturity of three months or less to be cash
equivalents.
Net Income Per Share: The Company has adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share" as of December 31,
1997 and restated 1996 earnings per share. Earnings per common share is based on
the weighted average shares outstanding during the year. Diluted earnings per
common share gives effect to all dilutive potential common shares outstanding
during the year.
F-14
<PAGE>
Stock Options: The Company applies APB Opinion 25 and related Interpretations
in accounting for its stock option plans.
NOTE 3 - CONCENTRATION OF CREDIT RISK
The Company provides services on credit to its clients, which are medical
facilities located throughout the United States. The Company performs ongoing
credit evaluation of its clients and requires no collateral. The Company has had
minimal credit losses on its accounts receivable and the allowance for doubtful
accounts is considered adequate at December 31, 1997. No allowance was
considered necessary at December 31, 1996.
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
December 31,
-----------------------------
1997 1996
----------- -----------
Dictation and other equipment $ 2,480,673 $ 1,706,294
Furniture and fixtures 94,157 84,069
Leasehold improvements 64,671 55,083
Automobile 23,400 23,400
Software 255,981 44,850
----------- -----------
2,918,882 1,913,696
Accumulated depreciation and amortization (1,372,803) (1,033,713)
----------- -----------
$ 1,546,079 $ 879,983
=========== ===========
NOTE 5 - BORROWINGS UNDER LINE OF CREDIT
The Company has a $500,000 revolving line of credit with Crestar Bank
subject to annual reviews and expires December 3, 2002. This replaces a $450,000
line of credit with Merrill Lynch Business Financial Services, Inc as of June
30, 1997. Borrowings under these lines of credit at December 31, 1997 and 1996
amounted to $132,318 and $329,029, respectively. Interest is payable at prime
plus one per cent per annum (9.5% at December 31, 1997). The line of credit is
secured by all assets of the Company.
Borrowings under this line of credit are solely for working capital purposes.
The related loan and security agreement requires the Company to, among
other things, submit annual reviewed financial statements within 120 days after
the end of each fiscal year, and unaudited interim financial statements within
20 days after the end of each month. The Company is in compliance with these
reporting covenants.
NOTE 6 - INCOME TAXES
The Company is taxed as a C corporation. Effective January 1, 1997 the
Company converted from the cash method to the accrual method of reporting for
Federal income tax purposes. The cumulative difference between cash and accrual
basis tax reporting as of December 31, 1996 is $935,961. One quarter of this
amount is required to be included in the Company's taxable income during each of
the four years 1997 to 2000.
F-15
<PAGE>
NOTE 6 - INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes for the year ended December 31,
1997 and December 31, 1996 consists of the following:
1997 1996
--------- ---------
Current tax expense
Federal $ 364,000 $ 27,000
State 69,000 8,000
--------- ---------
433,000 35,000
--------- ---------
Deferred tax expense (benefit)
Federal (34,000) 183,000
State (6,000) 35,000
--------- ---------
(40,000) 218,000
--------- ---------
Total $ 393,000 $ 253,000
========= =========
Components of net deferred tax assets and liabilities as of December 31,
1997 and 1996 are as follows:
1997 1996
-------- --------
Deferred tax liabilities:
Accounts receivable $ $440,000
Prepaid expenses 2,000
Prepaid income taxes 6,000
Property and equipment 161,000 69,000
Cash to accrual adjustment 267,000
-------- --------
Total deferred tax liabilities 428,000 517,000
Deferred tax assets:
Accounts receivable allowance 15,000
Moving reserve 19,000
Accounts payable 53,000
Accrued payroll 14,000 44,000
-------- --------
Total deferred tax assets 48,000 97,000
-------- --------
Less valuation allowance -- --
-------- --------
Net deferred tax assets 48,000 97,000
-------- --------
Net deferred tax liabilities as of December 31, 1997
and 1996 (including $41,000 and $351,000,
respectively, classified as current) $380,000 $420,000
======== ========
F-16
<PAGE>
NOTE 6 - INCOME TAXES (CONTINUED)
Income tax expense for the years ended December 31, 1997 and 1996, respectively,
differ from the Federal statutory rate as follows:
Years ended December 31,
------------------------
1997 1996
---- ----
Statutory Federal income tax rate 34.0% 34.0%
Effect of graduated rates (1.5)
State income taxes, net of Federal tax benefit 4.0 4.0
Other 0.6 0.0
---- ----
38.6% 36.5%
==== ====
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
-------------------------
1997 1996
-------- --------
Automobile installment loan, 10% interest
due December 1998 $ 7,123 $ 13,058
Less current portion (6,547) (5,931)
-------- --------
$ 576 $ 7,127
======== ========
NOTE 8 - CAPITAL LEASES
The Company leases various equipment under long-term contracts. Property and
equipment includes the following amounts for leases that have been capitalized:
December 31,
-----------------------------
1997 1996
--------- ---------
Dictation and other equipment $ 104,515 $ 104,515
Allowance for depreciation (58,204) (37,301)
--------- ---------
$ 46,311 $ 67,214
========= =========
Depreciation of these assets, computed by the straight line method over
five years, is included in depreciation expense.
F-17
<PAGE>
NOTE 9 - FIXED STOCK OPTION PLANS
At December 31, 1997 and 1996, the Company has a stock-based compensation
plan, which is described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for its fixed option plan. Had compensation cost for the
Company's stock-based compensation plan been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
SFAS No. 123, Accounting for Stock Based Compensation, the Company's net income
and earnings per share (EPS) for 1997 and 1996 would have been reduced to the
pro forma amounts indicated below:
1997 1996
--------- ---------
Net income as reported $ 616,226 $ 439,667
Pro forma $ 563,226 $ 408,667
Basic EPS as reported $ .10 $ .07
Pro forma $ .09 $ .07
Diluted EPS as reported $ .09 $ .07
Pro forma $ .08 $ .07
The effect of applying SFAS No.123 is not likely to be representative of
the effects on reported net income for future years due, among other things, to
the effects of vesting.
In March 1996, the Board of Directors authorized the establishment of a
non-qualified stock option plan for its directors, full-time employees and
consultants (the Plan) and reserved 1,300,000 shares of the Company's common
stock for issuance upon the exercise of options granted under this Plan. In
September, 1997, the Board of Directors approved reserving an additional 300,000
shares of the Company's common stock for issuance upon the exercise of options
granted under this Plan. All options granted to date under the Plan are granted
at fair market value as of the date of the grant, and have a maximum term of ten
years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
1997 1996
-------- ------
Expected volatility 60% 60%
Risk-free interest rate 5.4% 6.3%
Expected lives 4 years 5 years
Dividend yield - -
F-18
<PAGE>
NOTE 9 - FIXED STOCK OPTION PLANS (CONTINUED)
A summary of the status of the Company's stock option plans as of December 31,
1997 and 1996, and changes during the year, is presented below:
<TABLE>
<CAPTION>
1997 1996
---------------------------- -------------------------
Weighted Weighted
Fixed options Shares Average Price Shares Average Price
------------- ---------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 936,346 $ 0.76 -- --
Granted 549,925 1.50 936,796 $ 0.76
Exercised (5,399) 1.44 -- --
Forfeited (110,423) .79 (450) .75
---------- --------
Outstanding at end of year 1,370,449 1.06 936,346 $ 0.76
========== ========
Options exercisable at end of year 352,421 --
Weighted-average fair value of
options granted during the year $ 0.48 $ 0.23
========== ========
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------------
Number Weighted- Weighted- Number Weighted-
Range of Outstanding at Average Average Exercisable at Average
Exercise December 31, Remaining Exercise December 31, Exercise
Price 1997 Contractual Life Price 1997 Price
----------- ------------------ ---------------- ----------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$ .75 - $1.00 1,020,975 8.45 years $ .77 257,421 $ .77
$1.01 - $1.75 166,122 4.33 years 1.50 95,000 1.50
$1.76 - $2.50 183,352 9.83 years 2.27
--------- -------
1,370,449 8.13 years 1.06 352,421 .97
========= =======
</TABLE>
NOTE 10 - EMPLOYEE BENEFITS
During 1996, the Company established a 401(k) plan for its employees. This
plan is funded jointly by employee and employer contributions. Employees are
allowed to contribute up to 15% of their salary subject to an overall
limitation. The Company contributes 20% of the amount contributed by employees,
limited to 5% of the employee's salary. Employer contributions to this plan for
the year ended December 31, 1997 and 1996 totaled $7,801 and $3,314
respectively.
In December 1996, the Board of Directors approved an Employee Stock
Purchase Plan and reserved 150,000 shares of the Company's common stock. The
Company has issued 18,733 shares under the Plan as of December 31, 1997.
In March 1997, the Board of Directors authorized establishing a Section 125
Cafeteria Plan for the Company's employees.
F-19
<PAGE>
NOTE 11 - CASH FLOW INFORMATION
Non cash investing and financing activities excluded from the statements of
cash flows consist of property and equipment acquired under capital leases
totaling $104,390 for the year ended December 31, 1996. Net cash provided by
operating activities includes interest payments of $23,169 and $39,187 for the
years ended December 31, 1997 and 1996, respectively. The Company made income
tax payments of $35,425 and $25,000 during 1997 and 1996 respectively.
NOTE 12 - MAJOR CUSTOMERS
The Company has no customer exceeding 10% of total revenues for the year
ended December 31, 1997. Revenues from several contracts with the U.S. Naval and
two Veterans Administration hospitals aggregated approximately $928,000 for the
year ended December 31, 1996. Revenues exceeding 10% of total revenues from one
nonprofit hospital group aggregated approximately $867,000 for the year ended
December 31, 1996. Revenues exceeding 10% of total revenues from one for-profit
hospital group aggregated approximately $750,000 for the year ended December 31,
1996.
NOTE 13 - EARNINGS PER SHARE DISCLOSURE
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- --------- -------
<S> <C> <C> <C>
For Year Ended December 31, 1997
Basic earnings per share
Income available to common stockholders $ 616,266 6,259,765 $ .10
Effect of Dilutive Securities
Stock options 568,018
--------- --------- -------
Diluted earnings per share
Income available to common stockholders, including
assumed conversions $ 616,266 6,827,783 $ .09
========= ========= =======
For Year Ended December 31, 1996
Basic earnings per share
Income available to common stockholder $ 439,667 6,257,480 $ .07
Effect of Dilutive Securities
Stock options 95,188
--------- --------- -------
Diluted earnings per share
Income available to common stockholders, including
assumed conversions $ 439,667 6,352,668 $ .07
========= ========= =======
</TABLE>
Options to purchase 183,550 shares of common stock at $2.25 to $2.38 per
share were outstanding during October to December, 1997 but were not included in
the computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares. The options, which expire
from October to December, 2007, were still outstanding at the end of 1997.
F-20
<PAGE>
NOTE 14 - COMMITMENTS
The Company rents office space under two agreements that expire August 31,
1999 and October 31, 1999. DDI leases an automobile under a three year operating
lease through July 1998 at a cost of $461 per month. The Company also leases a
copier under a three year operating lease through March 18, 2000 at a cost of
$554 per month.
The future minimum lease payments under capital leases (see Note 8) and
non-cancelable operating leases for office space, equipment, and automobile as
of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases Total
--------- --------- ---------
<S> <C> <C> <C>
Year Ending December 31,
1998 $ 25,448 $ 101,693 $ 127,141
1999 -- 72,845 72,845
2000 -- 1,661 1,661
--------- --------- ---------
Total minimum lease payments 25,448 $ 176,199 $ 201,647
========= =========
Amount representing interest (1,134)
---------
Present value of net minimum
lease payments $ 24,314
=========
</TABLE>
Rent expense under operating leases for the years ended December 31, 1997
and 1996 totaled $96,356 and
F-21
<PAGE>
ANNEX A
DELAWARE GENERAL CORPORATION LAW
SECTION 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to Sections 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
A-1
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof, that appraisal rights are available for any or
all of the shares of the constituent corporations, and shall include in such
notice a copy of this section. Each stockholder electing to demand the appraisal
of his shares shall deliver to the corporation, before the taking of the vote on
the merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228 or
253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective ate
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a second
notice before the effective date of the merger or consolidation notifying each
of the holders of any class or series to stock of such constituent corporation
that are entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send such a
A-2
<PAGE>
second notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by one or more publications at
least one week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
A-3
<PAGE>
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
A-4
<PAGE>
ANNEX B
===============================================================================
AGREEMENT AND PLAN OF MERGER
AMONG
TRANSCRIPTIONS, LTD.
AND
MEDQUIST INC.
AND
DIGITAL DICTATION, INC.,
PROACTIVE PARTNERS, L.P.,
LAGUNITAS PARTNERS, L.P.,
GRUBER & MC BAINE INTERNATIONAL,
AND
RICHARD D. CAMERON
===============================================================================
B-1
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the "Agreement") is made on May __,
1998, by and among MedQuist Inc., a New Jersey corporation ("MedQuist"),
Transcriptions, Ltd., a New Jersey corporation and a wholly-owned subsidiary of
MedQuist ("TL"), Digital Dictation, Inc., a Delaware corporation (the
"Company"), and Proactive Partners, L.P. ("Proactive"), Lagunitas Partners,
L.P., Gruber & McBaine International and Richard D. Cameron ("Cameron")
(collectively, the "Principal Shareholders").
BACKGROUND
TL and the Company desire to combine and merge pursuant to the terms of
this Agreement. The respective Boards of Directors of TL and the Company have
approved the merger of the Company into TL subject to the terms of this
Agreement (the "Merger"). The Principal Shareholders own Five Million Nine
Hundred Eight Thousand Six Hundred Seventy-Three (5,908,673) shares of the
issued and outstanding capital stock of the Company, constituting Ninety-Four
percent (94%) of the issued and outstanding capital stock of the Company
("Principal Shareholders' Common Stock") and options to purchase Three Hundred
Thousand (300,000) shares of the capital stock of the Company ("Principal
Options"), and prior to the Merger at the First Closing desire to exchange the
Principal Shareholders' Common Stock for shares of MedQuist Common, subject to
the terms of this Agreement. It is the intention of the parties to this
Agreement that the exchange and Merger for accounting purposes shall qualify for
treatment as a pooling-of-interests.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises, covenants, representations, warranties, and agreements herein
contained, and intending to be legally bound, the parties hereby agree as
follows:
ARTICLE 1
DEFINED TERMS
1.1. Certain Defined Terms. As used in this Agreement, the following terms
will have the meanings given to them below:
"Act" will mean the Securities Act of 1933, as amended.
B-2
<PAGE>
"Action" will mean any and all actions, suits, investigations,
proceedings, demands, assessments, audits, judgments and claims (including
employment-related claims) relating to a Person.
"Aggregate Merger Consideration" will mean that number of shares of
MedQuist Common having a Value equal to the sum of (i) the product of (X) Three
Dollars and Two Thousand Thirty-Three Ten Thousandth Cents ($3.2033), multiplied
by (Y) the Outstanding Shares, and (ii) the Option Value; subject to adjustment
as provided in this Agreement and further subject to proportional adjustment for
any stock splits, stock dividends or recapitalizations of MedQuist.
"Assets" will mean all of the assets of the Company, whether real,
personal or mixed, owned or leased as of the date of this Agreement and such
other assets acquired after the date of this Agreement and on or prior to the
First Closing Date.
"Auditor" will mean Arthur Andersen LLP.
"Benefit Plans" will have the meaning given to it in Section 3.14 of
this Agreement.
"Claim" will have the meaning given to it in Section 7.2 of this
Agreement.
"Claim Notice" will have the meaning given to it in Section 7.2 of this
Agreement.
"Closing Date" will mean the date on which the First Closing or the
Second Closing is scheduled to occur.
"Closing" will mean the closing of the transactions contemplated at the
First Closing or Second Closing under this Agreement on the respective Closing
Date.
"Code" will mean the Internal Revenue Code of 1986, as amended.
"Company Closing Balance Sheet" will mean the unaudited balance sheet
statement of the Company to be prepared in accordance with Section 5.5 hereof.
"Company Common Stock" will mean the common stock of the Company, $.01
par value per share.
B-3
<PAGE>
"Company Options" will mean the vested and unvested options to purchase
Company Stock under the terms of the 1996 Non-Qualified Option Plan, as amended
September 22, 1997 that are outstanding at the Effective Time.
"Contracts" will mean all contracts, agreements, arrangements,
commitments, purchase orders, sales orders and understandings to which the
Company is a party or by which any of its properties or assets may be bound,
whether written or oral.
"Creditor's Rights Laws" will have the meaning given to it in Section
3.2 of this Agreement.
"Damages" will mean any and all damages, losses, obligations,
deficiencies, liabilities, claims, encumbrances, penalties, costs, and expenses,
including, without limitation, reasonable attorneys' fees and disbursements and
expert and consulting fees, costs and expenses.
"Dispute Notice" will have the meaning given to it in Section 7.3 of
this Agreement.
"Effective Time" will mean the time of filing of (or the designated
effective date set forth in) the certificates of merger of TL and the Company in
accordance with applicable laws as delivered at the Second Closing.
"Encumbrances" will mean any claim, mortgage, assignment, conditional
sale, lease, easement, consignment, bailment, contingent interest, pledge, lien,
option, charge, security interest, preemptive right, right of first refusal,
encumbrance or other restrictions of any kind or nature whatsoever.
"Environmental Laws" will mean any federal, state or local law
(including but not limited to the Clean Water Act, 33 U.S.C. ss.ss. 1251 et
seq., the Toxic Substances Control Act, 15 U.S.C. ss.ss. 2601 et seq., the Clean
Air Act, 42 U.S.C. ss.ss. 7401 et seq., the Safe Drinking Water Act, 42 U.S.C.
ss.ss. 300f et seq., the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. ss.ss. 9601 et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. ss.ss. 6901 et seq., the River and Harbor Act, 33 U.S.C.
ss.ss. 407 et seq., and the Occupational Safety and Health Act, 29 U.S.C. ss.ss.
651 et seq., each as may be amended from time to time), court order (whether or
not by consent), any duties imposed by applicable common law and any applicable
provision or condition of any permit relating to (i) the protection of the
environment, employees or the public welfare from actual or potential exposure
(or the effects of exposure) to any actual or potential release, discharge,
disposal or emission (whether past or present) of any Hazardous Substance or
(ii) the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of any Hazardous Substance.
B-4
<PAGE>
"ERISA" will mean the Employee Retirement Income Security Act of 1974,
as amended.
"Escrow Agent" will mean Crestar Bank.
"Escrow Agreement" will mean the Escrow Agreement among TL, the Company,
the Principal Shareholders, for themselves and on behalf of the Public
Shareholders, and the Escrow Agent, substantially in the form attached hereto as
Exhibit B.
"Escrowed Shares" will mean the Principal Shareholders' Escrowed Shares
together with the Public Escrowed Shares.
"Exchange Agent" will mean American Stock Transfer & Trust Co.
"Exercise Price" will mean the amount due from the option holder upon
the exercise of a particular option to purchase Company Common Stock from the
Company under the Option Plan.
"Financial Statements" will mean the financial statements of the Company
as at December 31, 1997, 1996 and 1995, including balance sheet statements and
income statements of the Company for each of the periods then ended, together
with any notes thereto, the Company's financial statements for each month of
1998 prior to the First Closing Date, and the March 31, 1998 Balance Sheet.
"First Closing" will mean the Closing of the exchange of Company Common
Stock held by the Principal Shareholders for MedQuist Common in accordance with
this Agreement.
"First Closing Date" will mean the date hereof or, if all conditions to
the First Closing have not been satisfied, on the date hereof as soon as
practical following the date such conditions have been satisfied, subject to the
provisions for termination set forth in Section 9.1 of this Agreement.
"GAAP" will mean generally accepted accounting principles consistently
applied.
"Governmental Entity" will mean any federal, state or local department,
official, commission, authority, board, bureau, agency or other public body,
domestic or foreign.
"Hazardous Substances" will mean any toxic or hazardous gaseous, liquid
or solid material or waste that may or could pose a hazard to the environment or
human health or
B-5
<PAGE>
safety including (i) any "hazardous substances" as defined by the
federal Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. ss.ss. 9601 et seq., (ii) any "extremely hazardous substance," "hazardous
chemical" or "toxic chemical" as those terms are defined by the federal
Emergency Planning and Community Right-to-Know Act, 42 U.S.C. ss.ss. 11001 et
seq., (iii) any "hazardous waste," as defined under the federal Solid Waste
Disposal Act, as amended by the Resource Conservation and Recovery Act, 42
U.S.C. ss.ss. 6901 et seq., (iv) any "pollutant," as defined under the federal
Water Pollution Control Act, 33 U.S.C. ss.ss. 1251 et seq., as any of such laws
in clauses (i) through (iv) may be amended from time to time, and (v) any
regulated substance or waste under any laws that currently exist or that may be
enacted, promulgated or issued in the future by any federal, state or local
governmental authorities concerning protection of the environment or the public
welfare.
"Indemnified Parties" will have the meaning given it in Section 10.1 of
this Agreement.
"Intellectual Properties" will mean all trademarks, trade names, assumed
names, service marks, logos, patents, patent rights, copyrights, drawings, trade
secrets, technology, know-how and processes, applications of or relating to any
of the foregoing or any other intellectual property necessary in the conduct of
the Company's business in the manner conducted at or prior to the First Closing.
"IRS" will mean the Internal Revenue Service.
"Labor Dispute" will mean any actual or threatened union organization
campaign, strike, slow down, work stoppage or other labor disturbance.
"Material Adverse Effect" will mean a material adverse effect on the
business, operations, financial or other condition or prospect of the Company or
TL, as the case may be, taken as a whole.
"March 31, 1998 Balance Sheet" will mean the balance sheet of the
Company as of March 31, 1998.
"MedQuist Common" will mean the common stock, no par value, of
MedQuist.
"MedQuist Option" will have the meaning given to it in Section 2.10 of
this Agreement.
"MedQuist SEC Documents" will have the meaning given to it in Section
4.6 of this Agreement.
B-6
<PAGE>
"Merger" will have the meaning given to it in Background section of this
Agreement.
"Net Worth" will mean the sum of the total assets less the total
liabilities of the Company, determined in accordance with GAAP.
"Option Plan" will mean the Company's 1996 Non-Qualified Option Plan, as
amended September 22, 1997.
"Option Value" will mean the summation of (i) the difference between
Three Dollars and Two Thousand One Hundred Sixty-Eight Ten Thousandths ($3.2168)
and (ii) the Exercise Price, for each Company Option.
"Outstanding Shares" will mean the number of shares of Company Common
Stock set forth in Section 3.4 of the Disclosure Schedules, such number being
six million three hundred twenty-five thousand five hundred three (6,325,503).
"Permits" will mean all surety bonds, permits, licenses, zoning
variances, approvals, exemptions, and other authorizations for the operation of
the businesses of the Company as presently operated.
"Per Share Merger Consideration" shall mean (i) Three Dollars and Two
Thousand Thirty-Three Ten Thousandth Cents ($3.2033), subject to adjustment as
provided in this Agreement, divided by (ii) the Value.
"Person" will mean any natural person, corporation, partnership,
unincorporated association, trust, Governmental Entity, joint venture or trade
group, or any individual, entity or group that is a part of, or associated with,
any of the foregoing.
"Premises" will mean the real property located at 8230 Old Courthouse
Road, Vienna, Virginia.
"Principal Options" will have the meaning given to it in the Background
section of this Agreement.
"Principal Shareholders' Common Stock" will have the meaning given to it
in the Background section of this Agreement.
"Principal Shareholders' Escrowed Shares" will have the meaning given to
it in Section 2.2 of this Agreement.
B-7
<PAGE>
"Public Escrowed Shares" will have the meaning given to it in Section
2.5 of this Agreement.
"Public Shareholders" will mean all of the shareholders of Company
Common on the Second Closing Date together with persons and entities holding
rights to acquire Company Common Stock or securities exchangeable for,
convertible into, or representing the right to receive, Company Common Stock
other than the Principal Shareholders.
"Public Stock Certificates" will have the meaning given it in Section
2.6(b) of the Agreement.
"SEC" will mean the U.S. Securities and Exchange Commission.
"Second Closing" will mean the consummation of the transactions
contemplated to occur in connection with the Merger of TL and the Company.
"Second Closing Date" will mean the date on which all conditions to the
First Closing and the Second Closing have been satisfied, or as soon as
practical thereafter, subject to the provisions for termination set forth in
Section 9.1 of this Agreement.
"Securities Laws" will mean the Act and any federal or state securities
laws, rules and regulations.
"Shareholders" will mean together the Principal Shareholders and Public
Shareholders.
"Shareholders Agreement" will mean the Shareholders' Agreement dated
October 9, 1995 among the Company, Cameron and Proactive.
"Surviving Corporation" will have the meaning given it in Section 2.3 of
this Agreement.
"Surviving Warranty" will have the meaning given it in Section 7.1 of
this Agreement.
"Survival Period" will have the meaning given it in Section 7.1 of this
Agreement.
"Taxes" will mean all taxes, fees, levies, duties, charges or other like
assessments including, without limitation, income, withholding, gross receipts,
excise, real or personal property, asset, sales, use, license, payroll,
transaction, capital, net worth and franchise
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taxes imposed by or payable to any federal, state, county, local or
foreign government, taxing authority, subdivision or agency thereof, including
interest, penalties, additions to tax or additional amounts thereto.
"Tax Return" will mean any report, return, declaration or other
information required to be supplied to a taxing authority in connection with
Taxes.
"Value" shall mean the value of a single share of MedQuist Common equal
to the Bloomberg weighted average price of MedQuist Common for the ten (10)
trading days immediately preceding the First Closing Date.
"Voting Agreements" will mean all voting trusts, voting agreements,
proxies and other voting restrictions of any kind or nature whatsoever.
ARTICLE 2
THE FIRST CLOSING, MERGER AND RELATED MATTERS
2.1. First Closing. Subject to the terms and conditions of this Agreement,
on the First Closing Date, each of the Principal Shareholders shall exchange all
of the shares of the Principal Shareholders' Common Stock, and TL shall exchange
therefor that number of shares of MedQuist Common equal to the Per Share Merger
Consideration for each such share of Company Common Stock so exchanged. TL shall
pay cash in lieu of any fractional shares of MedQuist Common which, but for this
provision, would be issued as part of the Aggregate Merger Consideration
pursuant to this Section 2.1.
2.2. Exchange of Principal Shareholders' Certificates. On the First Closing
Date, the Principal Shareholders shall surrender and deliver to TL the stock
certificates representing all of the Principal Shareholders' Common Stock in
exchange for the consideration set forth in Section 2.1 above; provided,
however, that ten percent (10%) of the shares representing such consideration
("Principal Shareholders' Escrowed Shares") shall be deposited with, and held
by, the Escrow Agent pursuant to the Escrow Agreement and subject to the
provisions of Article 7 of this Agreement. If the Escrow Agreement is not
executed at the time of the First Closing, then MedQuist shall hold the
Principal Shareholders' Escrowed Shares in reserve until such time as the Escrow
Agreement is executed. Upon execution of the Escrow Agreement, MedQuist shall
deliver to the Escrow Agent the Principal Shareholders' Escrowed Shares. The
Principal Shareholders shall be entitled to vote the Principal Shareholders'
Escrowed Shares while such shares are in the possession of MedQuist or the
Escrow Agent. Any dividends declared on the Principal Shareholders' Escrowed
Shares shall attach to such shares and shall be distributed to the Person to
whom the Escrow Agent delivers such shares.
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2.3. Second Closing; the Merger. Subject to the terms and conditions of
this Agreement, on the Second Closing Date, TL and the Company shall duly
execute, acknowledge and file certificates or articles of merger in their
respective jurisdictions of incorporation and all other documentation necessary
to consummate the Merger of Company into TL. As of the Effective Time, the
separate corporate existence of the Company shall cease and TL shall continue as
the surviving corporation under and pursuant to the laws of the State of New
Jersey under the name Transcriptions, Ltd. (the "Surviving Corporation").
2.4. Consideration; Conversion of Stock. At the Effective Time, each share
of Company Common Stock then issued and outstanding shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into and represent the right to receive the Per Share Merger Consideration;
provided that any Company Shares held by TL or any Affiliate of TL shall be
canceled and shall not be entitled to receive any Per Share Merger
Consideration. TL shall pay cash in lieu of any fractional shares of MedQuist
Common which, but for this provision, would be issued as part of the Aggregate
Merger Consideration pursuant to this Section 2.4.
2.5. Public Escrowed Shares. On the Second Closing Date, ten percent (10%)
of the shares representing the consideration set forth in Section 2.4 above (the
"Public Escrowed Shares") shall be deposited with the Escrow Agent pursuant to
the terms of the Escrow Agreement and subject to the provisions of Article 7
hereof. Each Public Shareholder shall be entitled to vote those of the Public
Escrowed Shares that would be payable to him upon the release of the entire
number of Public Escrowed Shares to the Public Shareholder while such shares are
in the possession of the Escrow Agent. Any dividends declared on the Public
Escrowed Shares shall attach to such shares, and shall be distributed to the
Person to whom the Escrow Agent delivers such shares.
2.6. Exchange of Public Shareholders' Certificates.
(a) Subject to the terms and conditions hereof, immediately prior to the
Effective Time, TL shall deposit the shares MedQuist Common issuable under
Section 2.4 less the Public Escrowed Shares, plus an amount of cash to be paid
in lieu of fractional shares, with the Exchange Agent.
(b) Promptly after the Effective Time, the Exchange Agent shall mail to
each record holder of Company Common Stock a letter of transmittal and
instructions for use in surrendering certificates representing the shares of
Company Common Stock (including lost share affidavits in a form reasonably
acceptable to MedQuist, the "Public Stock Certificates") and receiving the Per
Share Merger Consideration therefor. Upon the surrender of each Public Stock
Certificate, together with such letter of transmittal duly executed and
completed in accordance with the instructions thereto, the holder of such
certificate shall be entitled to receive
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in exchange therefor ninety percent (90%) of the product of (i) the Per Share
Merger Consideration multiplied by (ii) the number of shares of Company Common
Stock represented by such Public Stock Certificate, and such Public Stock
Certificate shall be canceled. Until so surrendered and exchanged, each such
Public Stock Certificate shall represent solely the right to receive hereunder
the Per Share Merger Consideration multiplied by the number of shares of Company
Common Stock that are represented by such Public Stock Certificate. If any
shares of MedQuist Common are to be issued to a person other than the person in
whose name the Public Stock Certificate surrendered in exchange therefor is
registered, it shall be a condition to such exchange that the Public Stock
Certificate so surrendered be properly endorsed and otherwise in proper form for
transfer and that the person requesting such exchange shall pay to the Exchange
Agent any transfer or other similar taxes required by reason of the issuance of
such shares to a person other than the registered holder of the Public Stock
Certificate surrendered, or such person shall establish to the satisfaction of
the Exchange Agent that such tax has been paid or is not applicable.
(c) After the Effective Time there shall be no transfers on the stock
transfer books of the Company or the Surviving Corporation of any shares of
Company Common Stock. If, after the Effective Time, Public Stock Certificates
are presented to the Surviving Corporation or the Exchange Agent, they shall be
canceled and exchanged for the Per Share Merger Consideration, as provided in
this Article 2.
2.7. Effect of Exchange and Merger; Officers and Directors. The
Certificate of Incorporation and Bylaws of TL, as in effect immediately prior to
the Effective Time, shall be the Certificate of Incorporation and Bylaws of the
Surviving Corporation. From and after the First Closing, the persons serving as
the directors and officers of the Company immediately prior to the First Closing
shall resign and persons designated by TL shall be the directors and officers of
the Company.
2.8. Books and Records. On the First Closing Date, the Company shall
deliver to TL all minute books, stock record books and corporate seals of the
Company, and the original copies of all books of account, written Contracts,
securities, customer lists, files and other documents, instruments and papers of
all kind and nature belonging to or relating to the business of the Company and
necessary or desirable in TL's judgment for the on-going conduct of the Company
and its business, whether in the possession of the Principal Shareholders or the
Company. TL shall provide the Principal Shareholders with access to such records
in accordance with Article 8 hereof.
2.9. Closing. The Closings will be held at 10:00 A.M. on the respective
Closing Date at the offices of Pepper Hamilton LLP, 3000 Two Logan Square,
Philadelphia, Pennsylvania 19103.
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2.10. Options Conversion. At the Effective Time, each of the Company
Options shall be converted automatically into an option to purchase shares of
MedQuist Common (a "MedQuist Option") in an amount and at an exercise price
determined as follows:
(a) The number of shares of MedQuist Common to be subject to the
MedQuist Options issuable in exchange for, and upon cancellation of, each
Company Option shall be equal to the product of (i) the number of shares of
Company Common Stock issuable upon the exercise of the Company Options and (ii)
the Per Share Merger Consideration; provided, however, that any fractional
shares of MedQuist Common resulting from such multiplication shall be rounded
down to the nearest share; and
(b) The exercise price per share of each MedQuist Option shall be equal
to the product of (i) (A) the respective Exercise Price of the respective
Company Option for which the MedQuist Option is being converted and issued in
place thereof divided by (B) Three Dollars and Two Thousand Thirty-Three Ten
Thousandth Cents ($3.2033), multiplied by (ii) the Value; provided, however,
that such exercise price shall be rounded up to the nearest cent.
The duration and other terms of each MedQuist Option shall be the same
as that of each Company Option exchanged therefor.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS
Except as specifically disclosed to TL on the Disclosure Schedules
attached to this Agreement as Exhibit A, the Company and the Principal
Shareholders, jointly and severally, represent and warrant and, where
applicable, covenant, as provided in each Section of this Article 3:
3.1. Organization and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite power and authority to own, lease and operate its
properties and to carry on its business as presently conducted. The Company is
duly qualified or licensed, and in good standing to do business, in each
jurisdiction in which the property owned, leased or operated by the Company, or
the nature of the business conducted by the Company, makes such qualification or
licensing necessary, except in such jurisdictions where the failure to be so
duly qualified or licensed and in good standing would not have a Material
Adverse Effect.
3.2. Power and Authority. The Principal Shareholders each have the legal
capacity, and the Company has the requisite power and authority, to execute and
deliver this
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Agreement, to perform their respective obligations hereunder and to consummate
the transactions contemplated by this Agreement. The Board of Directors of the
Company has duly and validly authorized and approved the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby and no other proceedings or actions on the part of the
Principal Shareholders or the Company are necessary to authorize the execution
and delivery of this Agreement or to consummate the transactions contemplated by
this Agreement. The Principal Shareholders and the Company each has duly and
validly executed and delivered this Agreement, which is the valid and binding
agreement of the Principal Shareholders and the Company enforceable against the
Principal Shareholders and the Company in accordance with their respective
terms, except as such enforcement may be limited by applicable bankruptcy,
insolvency, moratorium, or similar laws affecting the enforcement of creditors'
rights generally, or by general principles of equity (regardless of whether such
enforceability is considered in a proceeding at law or in equity) (collectively,
"Creditor's Rights Laws").
3.3. Consents and Approvals; No Violations. Assuming the filing of any
and all documents necessary to consummate the Merger, no filing with, and no
Permit, authorization, consent or approval of any Governmental Entity is
necessary for the consummation of transactions contemplated by this Agreement.
The execution, delivery and performance of this Agreement will not (i) conflict
with or result in any breach of any provision of the Certificate of
Incorporation or Bylaws of the Company or any agreement or other document
binding on the Principal Shareholders, (ii) except as set forth in Section 3.3
of the Disclosure Schedules, result in a violation or breach of, or constitute
with or without due notice or lapse of time or both a default under, or give
rise to any right of termination, cancellation or acceleration under, or result
in the forfeiture of any rights, entitlements or privileges under, or create any
right or entitlement under, or require the consent or approval of any Person
under, any of the terms, conditions or provisions of any Contract, (iii) violate
any order, writ, injunction, decree, statute, treaty, rule or regulation
applicable to the Principal Shareholders or the Company, or any of their
properties or assets, or (iv) result in the creation of or imposition of any
Encumbrance upon any property or assets of the Company.
3.4. Capitalization. Section 3.4 of the Disclosure Schedules sets forth
all of the authorized capital stock and classes of capital stock of the Company
and the respective ownership interests of the Principal Shareholders and
aggregate number of such shares owned by Public Shareholders and the number of
registered Public Shareholders and the identities and interest held of any other
person having an ownership interest in the Company. All of the issued and
outstanding shares of Company Common Stock are validly issued, fully paid and
nonassessable, and are not subject to any Encumbrances or Voting Agreements.
Except as set forth on Section 3.4 of the Disclosure Schedules, there are no
outstanding subscriptions, options, warrants, calls, rights, convertible
securities or other agreements or commitments (contingent or otherwise) of any
character relating to the issued or unissued Company Common Stock or other
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capital stock or securities of the Company, or otherwise obligating the Company
to issue, transfer, register or sell any such securities. The Company has no
direct or indirect, legal or beneficial interest in any corporation,
partnership, trust or other entity. The Company has not made, and as of the
First Closing Date will not have made, any redemptions of, or distributions with
respect to, any of its shares of capital stock.
3.5. Financial Statements; Reports. The Company has previously delivered
to TL true and correct copies of all of the Financial Statements. The Financial
Statements have been prepared from the applicable books and records of the
Company in accordance with GAAP, consistently applied during the related
periods. The balance sheets contained in each of the Financial Statements fairly
present the financial condition of the Company as of the respective periods set
forth therein, and each income statement included in each of the Financial
Statements fairly presents the results of operations of the Company for the
respective periods set forth therein except as described below. The Company
Closing Balance Sheet shall be prepared from the applicable books and records of
the Company in accordance with GAAP, consistently applied, and shall be true and
correct in all material respects and shall fairly present the financial
condition of the Company as of the First Closing Date. The Financial Statements,
other than the Financial Statements for 1998, have been audited by Hozik &
Charin and include the unqualified opinion of such firm.
3.6. No Undisclosed Liabilities. The Company has no material liabilities
or obligations, absolute, accrued, fixed, contingent, liquidated, unliquidated
or otherwise, except for (i) those reflected or reserved against which reserves
are adequate on the March 31, 1998 Balance Sheet and (ii) those which are
specifically disclosed in this Agreement or in the Disclosure Schedules. To the
best knowledge of the Principal Shareholders, there is no basis for the
assertion against the Company as of the date hereof or as of the First Closing
Date of any liability of any material nature or in any material amount not fully
reflected or reserved against in the Company's March 31, 1998 Balance Sheet.
Since March 31, 1998, the Company has not incurred any liabilities or
obligations whether absolute, accrued, fixed, contingent, liquidated,
unliquidated or otherwise, other than liabilities incurred in the ordinary
course of business consistent with past practice.
3.7. Absence of Certain Changes. Since January 1, 1998, the Company has
operated only in the ordinary course of business and there has not occurred: (a)
any transaction in which the Company incurred any material debts, liabilities or
obligations except in the ordinary course of business and reflected on the March
31, 1998 Balance Sheet, (b) any transaction in which the Company discharged or
satisfied any Encumbrances except in the ordinary course of business, (c) any
transaction in which the Company mortgaged, pledged or subjected to Encumbrance
any of the Assets, (d) any transaction in which the Company sold or transferred
any of the Assets or canceled any debts or claims, (e) any transaction in which
the Company suffered any extraordinary losses or waived any rights of
substantial value, (f) any material
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damage, destruction or loss (whether or not covered by insurance) or any
condemnation by governmental authorities which has or may affect the business or
the properties of the Company, (g) any declaration, setting aside or payment of
any dividend or other distribution in respect of any of the capital stock of the
Company, or any direct or indirect redemption, purchase or other acquisition of
the capital stock of the Company, (h) any increase not in the ordinary course of
business in the compensation payable or to become payable by the Company, or (i)
any undertaking or any change in any existing obligation of any kind of the
Company other than in the ordinary course of business.
3.8. No Default. Neither the Principal Shareholders, Public Shareholders
nor the Company is in default or violation, and no event has occurred which with
notice or the lapse of time or both would constitute a material default or
violation, of any material term, condition or provision of (i) the Certificate
of Incorporation or Bylaws of the Company, or (ii) any material Contract other
than with respect to required document turnaround times as described on Section
3.8 of the Disclosure Schedules.
3.9. Litigation; Compliance with Laws; Permits. There are no Actions
pending or, to the best knowledge of the Principal Shareholders, threatened
against or related to the Company. There is not and has not been any failure by
the Company or the Principal Shareholders to comply with, nor any default under,
any law, ordinance, requirement, regulation, or order applicable to the Company,
which failure to comply or default would have a Material Adverse Effect on the
Company. There is no violation of, default with respect to, or failure to comply
with any order, writ, injunction, judgment, or decree of any court or
Governmental Entity or other instrumentality, issued or pending against the
Company. The Company has obtained all Permits necessary for the operation of its
business as presently operated, and all such Permits are set forth on Section
3.9 of the Disclosure Schedules. The Company is in compliance with all relevant
Permits and the Permits are presently valid and in full force and effect and no
renovation, cancellation, or withdrawal thereof has been effected or, to the
best knowledge of the Principal Shareholders, threatened. The Company has not
made any illegal kickbacks, bribes or political contributions to any Person.
3.10. Intellectual Property. Section 3.10 of the Disclosure Schedules
sets forth a list and a brief description of all of the Intellectual Property of
the Company. No claim is pending, or, to the best knowledge of the Principal
Shareholders, threatened, relating to the ownership or present or past use of
the Intellectual Property, or conflicts with or infringes upon any rights of any
third party with respect to any Intellectual Property.
3.11. Contracts. Section 3.11 of the Disclosure Schedules sets forth a
complete and accurate list of each of the Company's material Contracts other
than the Contracts set forth on Schedule 3.12. True, complete and correct copies
of all written Contracts, including all
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<PAGE>
amendments, modifications or extensions thereof have been previously provided
to TL. Each Contract is valid and binding and in full force and effect.
3.12. Employee and Management Agreements. Section 3.12 of the Disclosure
Schedules sets forth a complete and correct list of all Contracts relating to
employment, compensation, severance, change-in-control, consulting,
indemnification, service, purchase or any other matter between or among the
Company and its present or former employees, officers, directors and consultants
pursuant to which the Company has any continuing obligations thereunder. True
and correct copies of all such agreements have been provided to TL.
3.13. Taxes. The Company has duly filed, in compliance with applicable
laws, all Tax Returns required to be filed by the Company prior to the date
hereof, and the Company has duly paid, caused to be paid or made adequate
provision and has reserved for the payment of all Taxes required to be paid in
respect of the periods covered by such Tax Returns and has made adequate
provision for payment of all Taxes anticipated to be payable in respect of all
taxable periods since the periods covered by such returns. The Company has
complied with the requirements of all applicable laws relating to the payment
and withholding of Taxes (including, without limitation, withholding of Taxes
pursuant to Sections 1441 and 1442 of the Code) and have, within the time and in
the manner prescribed by applicable laws, withheld from employee wages and paid
over, in a timely manner, to the proper taxing authorities all amounts required
to be so withheld and paid over under applicable laws. No claims for Taxes have
been asserted against the Company, and no deficiency for any Taxes has been
proposed, asserted or assessed which has not been resolved or paid in full. To
the best knowledge of the Principal Shareholders, no Tax Return or taxable
period of the Company is under examination and the Company has not received
notice of any pending audit. There are no outstanding agreements or waivers
extending the statutory period of limitation applicable to any Tax Return for
any period of the Company. There are no liens or encumbrances of any kind for
Taxes upon any assets or properties of the Company other than for Taxes not yet
due and payable. The Company has no obligation or liability to pay Taxes of or
attributable to any other person or entity. No issue or claim has been asserted
for Taxes by any taxing authority. The Company has not filed any consent
pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of
the Code apply to any disposition of a subsection (f) asset owned by the
Company.
3.14. Employee Benefit Matters.
(a) Section 3.14(a) of the Disclosure Schedules sets forth a true and
complete list of all plans, programs or arrangements which provide (i) employee
benefits or fringe benefits maintained by the Company or its Affiliates or (ii)
with respect to which contributions are made by the Company or its Affiliates
(including health, life insurance and other benefit plans maintained for
retirees), including without limitation (a) all plans, programs and arrangements
providing any form of deferred compensation, pension, profit sharing, stock
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option, stock purchase, savings, thrift, group insurance, accident, sickness,
medical, dental or disability benefits; (b) all vacation and severance pay; (c)
all incentive compensation, consulting and bonus agreements; and (d) all
benefits relating to the use of Company vehicles; whether or not such plans,
programs and arrangements constitute "employee benefit plans" within the meaning
of Section 3(3) of ERISA, and whether or not such plans, programs and
arrangements are in the nature of formal or informal understandings, and whether
or not pursuant to any collective bargaining arrangements. Said plans, programs
and arrangements sometimes are referred to collectively in this Agreement as the
"Benefit Plans." Neither the Company nor any of its Affiliates is a member,
whether or not incorporated, under common control (within the meaning of Section
414(c) of the Code) and all affiliated service groups (within the meaning of
Section 414(m) of the Code) is, or has ever been, a party to any pension plan or
welfare benefit plan that is a "multiemployer plan" (within the meaning of
Section 3(37) of ERISA).
(b) Each Benefit Plan complies in all material respects and has been
administered in accordance with the applicable provisions of ERISA and the Code.
No facts or circumstances exist which could result in any liability against the
Company or any Benefit Plan or any fiduciary of a Benefit Plan under any
provision of ERISA, the Code or any other applicable law by reason of any action
or failure to act in connection with any Benefit Plan, including, but not
limited to, any liability by reason of any payment of, or failure to pay,
benefits or any other amounts, or by reason of any credit or failure to give
credit for any benefits or rights in connection with any Benefit Plan. There has
not been asserted by any Benefit Plan participant, beneficiary or other person
any facts or circumstances which could result in any liability under any Benefit
Plan or any fiduciary of a Benefit Plan under any provision of ERISA, the Code
or any other applicable law by reason of any action or failure to act in
connection with any Benefit Plan, including but not limited to any liability by
reason of any payment of, or failure to pay, benefits or any other amounts, or
by reason of any credit or failure to give credit for any benefits or rights in
connection with any Benefit Plan.
(c) Except as set forth in Section 3.14(c) of the Disclosure
Statements, the Company does not have any severance agreements or arrangements,
or any formal or informal severance plan or practice, pursuant to which
any liability for severance payments to employees of the Company may arise,
regardless of whether separation from service occurs before, at the time of, or
after the First Closing Date.
3.15. Environmental Matters. The Company is in compliance with all
Environmental Laws.
3.16. Assets. Section 3.16 of the Disclosure Schedules sets
forth all of the Assets necessary to the business conducted by the Company as
presently conducted, all of which are in good operating condition. The Company
has good and marketable title to all Assets or a valid leasehold interest in all
property leased by the Company. All of the Assets are owned or
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held under lease free and clear of all Encumbrances. The Company owns or leases
all of the Assets necessary to carry on the businesses and operations of the
Company as presently conducted.
3.17. Labor Relations. The Company is not a party to any contract or
other agreement with any labor union and is not experiencing, the subject of,
or, to the Principal Shareholders' knowledge, threatened by, any union
organization campaign or any strike, slowdown, picketing, work stoppage, or
other labor disturbance by any labor union or group of employees. The Company
does not have and for the past three (3) years has not had (a) any unfair labor
practice charge or complaint or other proceeding pending or, to the best
knowledge of the Principal Shareholders, threatened against the Company before
the National Labor Relations Board or (b) any arbitrations, grievances, suits or
administrative proceedings before any Government Entity (including, without
limitation, the Equal Employment Opportunity Commission ("EEOC")) relating to
labor or employment matters involving any employees of the Company. The Company
is and has been in compliance for the past three years with all applicable laws
relating to employment and employment practices, terms and conditions of
employment, wages and hours, occupational safety and health and notice and the
requirements of the Worker Adjustment Retraining Act of 1988 or similar state or
local law.
3.18. Principal Shareholders' Brokers or Finders and Fees.
Except as set forth in Section 3.18 of the Disclosure Schedules, no agent,
broker, investment banker, financial advisor or other firm or person is or will
be entitled to any brokers' or finders' fee or any other commission or similar
fee from the Principal Shareholders or the Company in connection with this
Agreement. Section 3.18 sets forth a complete list of all fees, including all
broker's, finders', investment bankers', legal and accounting fees, incurred by
the Principal Shareholders and the Company in connection with the transactions
contemplated by this Agreement, and which have been or will be charged to the
Company.
3.19. Insurance. Section 3.19 of the Disclosure Schedules sets forth a
true and correct schedule of all policies of fire, liability, and other forms of
insurance, excluding the Benefit Plans, pursuant to which the Company or any of
the Assets are insured (whether or not held by the Company) or with respect to
which the Company directly or indirectly pays all or part of the premium
including the identity of the carrier, the policy number, the amounts and types
of coverage, the premium and the expiration date of each such policy. All of the
Assets of the Company are insured against fire and other casualty under the
policies and in the amounts and types of coverage set forth in Section 3.19 of
the Disclosure Schedules, and such policies are outstanding and duly in force
and the premiums thereon fully paid. No notice of cancellation or non-renewal
with respect to any insurance policy has been received by the Company. The
insurance policies are sufficient for compliance with all statutes, laws,
ordinances, regulations, orders, rules or other requirements of any Governmental
Entity, including, but not limited to, those covering safety, health,
transportation, recordkeeping, zoning, employment, wage and hour
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and price and wage control matters. The Company has not been refused any
insurance with respect to its assets or operations and no claim by the Company
under the insurance policies has been refused coverage by any insurer. There are
no pending claims against such insurance policies. There is no default by the
Company with respect to any provision contained in any insurance policy and all
claims made or, to the best knowledge of the Principal Shareholders, threatened
against the Company have been properly filed by the Company. The Company has
notified its insurance carrier of all pending and, to the best knowledge of the
Principal Shareholders, threatened litigation and claims, all of which are set
forth on Section 3.19 of the Disclosure Schedules. The Company has not received
any notice from its insurance carrier disclaiming coverage as to any of the
foregoing.
3.20. Bank Accounts. Section 3.20 of the Disclosure Schedules lists the
names and addresses of every bank and other financial institution in which the
Company maintains an account (whether checking, savings or otherwise), lock box
or safe deposit box, and the account numbers and names of persons having signing
authority or other access thereto. The Principal Shareholders acknowledge that
no such persons shall be authorized signatories after the First Closing.
3.21. Real Property. The Company owns no real property and the only real
property leased by the Company is the Premises.
3.22. Accounts Receivable. All of the accounts and notes receivable of
the Company as set forth on the March 31, 1998 Balance Sheet or arising since
the date thereof (a) are valid and genuine; (b) have arisen only in the ordinary
course of business; and (c) except to the extent of any reserves with respect
thereto are not subject to valid defenses, set-offs or counterclaims and have
been (or will be in the ordinary course of business) billed. Section 3.22 of the
Disclosure Schedules sets forth a true, correct and complete list of all
accounts receivable as of March 31, 1998. The allowance for doubtful accounts
reflected on the March 31, 1998 Balance Sheet has been determined in accordance
with GAAP. The Principal Shareholders do not know of any facts or circumstances
that are likely to result in any material increase in the uncollectibility of
such accounts and notes receivable in excess of any allowance therefor set forth
on the March 31, 1998 Balance Sheet.
3.23. Net Worth. The Net Worth of the Company as of March 31, 1998 was,
and as of the First Closing Date shall be no less than, One Million Nine Hundred
Fifty-Nine Thousand Five Hundred Eighty-One Dollars ($1,959,581).
3.24. Loans to Principal Shareholders, Employees and Others. Except as
set forth in Section 3.24 of the Disclosure Schedules, there are no outstanding
loans made by the Company to any shareholder, employee, director or officer of
the Company or to any other Person.
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3.25. Relations with Clients. Except as set forth in Section 3.25 of the
Disclosure Schedules, the Company has not received written or oral notice of
cancellation (or non-renewal) of any Contract for medical transcription services
and, to the best knowledge of the Principal Shareholders, no client is
contemplating the cancellation (or non-renewal) of any such Contract or altering
materially the amount of business done with the Company. Section 3.25 of the
Disclosure Schedules sets forth the name of the twenty (20) clients of the
Company, for each of the fiscal years 1996, 1997 and for the first four months
of 1998 were the largest dollar volume customers of the Company.
3.26. Compliance with Securities Laws. The Principal Shareholders
acknowledge that the MedQuist Common being exchanged hereunder for Company Stock
at the First Closing has not been registered under any Securities Law. The
Principal Shareholders are each acquiring the MedQuist Common pursuant to this
Agreement solely for their respective accounts, for investment purposes, and not
with the intent to distribute it to an unrelated third party, and pursuant to an
exemption from registration under the Act and applicable Securities Laws. Each
of the Principal Shareholders has such knowledge and experience in financial and
business matters and investments in general that makes such shareholder capable
of evaluating the merits and risks of the ownership and acquisition of the
MedQuist Common and has counseled with such shareholder's accountants, lawyers
and other financial advisors with respect to this Agreement, the Merger and the
transactions contemplated hereunder. Each of the Principal Shareholders and such
shareholder's advisors has been afforded the opportunity to ask such questions
and obtain such additional information regarding the Company as such shareholder
or such shareholder's advisors have considered necessary to enable them to
understand the nature of this investment in the shares of MedQuist Common. Each
of the Principal Shareholders and such shareholder's respective advisors are
aware that MedQuist is a publicly traded corporation subject to the filing
requirements of the Securities Laws and have been afforded the opportunity to
review or request copies of any forms, reports and documents relating to
MedQuist filed with the Securities and Exchange Commission and acknowledge
receipt of MedQuist's 1998 Proxy Statement and 1997 Annual Report on Form 10-K
and Form 10-Q for the quarter ended March 31, 1998 and that MedQuist and TL have
complied with any request made by any Principal Shareholder.
The Principal Shareholders acknowledge and agree that the MedQuist
Common Stock issued to them pursuant to this Agreement will contain the
following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY OTHER STATE OR FEDERAL
SECURITIES STATUTE. NO REOFFER, SALE,
TRANSFER, PLEDGE OR OTHER DISPOSITION
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THEREOF MAY BE MADE UNLESS THE SHARES ARE REGISTERED
UNDER THE ACT AND ANY OTHER APPLICABLE SECURITIES
STATUTE, OR AN EXEMPTION FROM SUCH REGISTRATION
REQUIREMENTS IS APPLICABLE TO SUCH TRANSACTION.
The Principal Shareholders each have full power and authority to vote
their respective shares of the Company Common Stock and have not granted the
right to vote such shares to any other Person prior to the First Closing.
3.27. Accounting Matters. The Principal Shareholders, having consulted
with their respective accountants, lawyers and financial advisors, have no
knowledge of any action taken or agreed to be taken by the Company or the
Principal Shareholders, or of any fact or circumstance, that is reasonably
likely to prevent the Merger from qualifying for pooling-of-interests accounting
treatment.
3.28. Statements True and Correct. No statement made by the Principal
Shareholders or the Company in this Agreement or Exhibits attached to this
Agreement or any document, instrument or certificate furnished or to be
furnished by the Principal Shareholders, Company, or any director or officer of
the Company contains or will contain any untrue statement of material fact or
omits or will omit to state a material fact required to be stated herein or
therein, or necessary in order to make the statements therein not misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF TL
TL and MedQuist hereby represent and warrant to the Company and the
Principal Shareholders as of the date of this Agreement as follows:
4.1. Organization and Good Standing. TL is a corporation duly organized,
validly existing and in good standing under the laws of the State of New Jersey
and has all requisite power and authority to own, lease and operate its
properties and to carry on its business as presently conducted. TL is duly
qualified or licensed and in good standing to do business, in each jurisdiction
in which the property owned, leased or operated by the Company, or the nature of
the business conducted by the Company, makes such qualification or licensing
necessary, except in such jurisdictions where the failure to be so duly
qualified or licensed and in good standing would not have a Material Adverse
Effect.
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4.2. Corporate Power and Authority. TL has full corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated by this Agreement, including without limitation the full corporate
power and authority to purchase and take title to the Company Common Stock upon
the terms and conditions set forth in this Agreement. TL has duly and validly
authorized the execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby, and no other corporate action on the part
of TL is necessary to authorize the execution and delivery of this Agreement or
to consummate the transactions contemplated by this Agreement. TL has duly and
validly executed and delivered this Agreement, and this Agreement is the valid
and binding obligation of TL, enforceable against TL in accordance with its
terms, except as such enforcement may be limited by applicable Creditor's Rights
Laws.
4.3. Validity of Contemplated Transactions, Etc. Assuming the filing of
any and all documents necessary to consummate the Merger, no filing with, and no
Permit, authorization, consent or approval of any Governmental Entity is
necessary for the consummation of transactions contemplated by this Agreement.
The execution, delivery and performance of this Agreement will not (i) conflict
with or result in any breach of any provision of the Certificate of
Incorporation or Bylaws of TL or any agreement or other document binding on TL,
(ii) result in a violation or breach of, or constitute with or without due
notice or lapse of time or both a default under, or give rise to any right of
termination, cancellation or acceleration under, or result in the forfeiture of
any rights, entitlements or privileges under, or create any right or entitlement
under, or require the consent or approval of any Person under, any of the terms,
conditions or provisions of any Contract, or (iii) violate any order, writ,
injunction, decree, statute, treaty, rule or regulation applicable to TL, or any
of its properties or assets.
4.4. Validity of Shares to be Issued. The shares of MedQuist Common to
be issued to the Principal Shareholders in connection with the First Closing and
to the Public Shareholders in connection with the Second Closing pursuant to
Article 2 hereof have been duly authorized and, when issued by MedQuist in
accordance with the terms of this Agreement, will be validly issued, fully paid
and non-assessable.
4.5. Capitalization of MedQuist. The authorized capital stock of
MedQuist consists of Sixty Million (60,000,000) shares of MedQuist Common and
Twelve Million One Hundred Eleven Thousand Nine Hundred Seventy-Five
(12,111,975) shares of preferred stock. As of May 22, 1998, (i) Eleven Million
Eighteen Thousand Nine Hundred Twenty-Eight (11,018,928) shares of MedQuist
Common were issued and outstanding; (ii) no shares of preferred stock of
MedQuist were issued and outstanding; (iii) no shares were held by MedQuist in
its treasury; (iv) approximately Six Hundred Four Thousand (604,000) MedQuist
Options were outstanding; and (v) approximately Three Hundred Twelve Thousand
(312,000) MedQuist Options were available for grant under MedQuist's stock
option plan. Except as set forth in the
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preceding sentence, at the close of business on May 1, 1998, no shares of
capital stock or other voting securities of MedQuist were issued, reserved for
issuance or outstanding.
4.6. SEC Documents. MedQuist has heretofore provided to the Company or
otherwise made available all reports, schedules, forms, statements and other
documents filed with the SEC since December 31, 1996 (the "MedQuist SEC
Documents"). As of their respective dates, the MedQuist SEC Documents complied
in all material respects with the requirements of the Securities Laws applicable
to such MedQuist SEC Documents, and, to the knowledge of MedQuist, none of the
MedQuist SEC Documents when filed contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. There has been no material change,
financial or otherwise, in the condition of MedQuist since the date of
MedQuist's Form 10-Q for the quarter ended March 31, 1998.
4.7. TL's Brokers or Finders. No agent, broker, investment banker,
financial advisor or other firm or person is or will be entitled to any brokers'
or finders' fee or any other commission or similar fee from TL in connection
with this Agreement and the transactions contemplated by this Agreement.
ARTICLE 5
ACTIVITIES PRIOR TO THE FIRST CLOSING DATE
BY THE COMPANY AND THE PRINCIPAL SHAREHOLDERS
5.1. Operation of Business. From and after the date of this Agreement to
the First Closing Date, except with the consent of TL or as otherwise
specifically contemplated by this Agreement, the Company shall conduct its
business solely in the ordinary course and shall:
(a) not amend the Company's Certificate of Incorporation or Bylaws
except as may be necessary to carry out this Agreement, the Merger or as
required by law;
(b) not make any changes in the management of the Company without the
consent of TL;
(c) not declare or pay any dividend of any kind or make any other
distribution or payment in respect of any capital stock of the Company, or
repurchase or agree to repurchase any of the capital stock, or issue any shares
of the capital stock of Company whether or not presently authorized, or change
any of the characteristics of the capital stock of Company or subject the
capital stock of the Company to any Encumbrance or voting agreement, or merge
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<PAGE>
or consolidate the Company with any other corporation or allow the
Company, its Assets or any part of its business to be acquired by any Person;
(d) not sell, transfer, or otherwise dispose of any Assets without
the prior written consent of TL, except in the ordinary course of business;
(e) not allow the Company to create, incur, assume, or guarantee any
indebtedness for money borrowed or create any Encumbrance on any of its Assets,
except in the ordinary course of business, and shall discharge prior to the
First Closing any other Encumbrance;
(f) maintain the Assets in good operating repair, order, and
condition, reasonable wear and tear excepted, and notify TL immediately
upon any material loss of, damage to, or destruction of any of the Assets;
(g) maintain in full force and effect the insurance coverage of the
types and in the amounts set forth in Section 3.19 of the Disclosure Schedules
and apply the proceeds received under any insurance policy or as a result of any
loss or destruction of or damage to any Assets or operations of the Company to
the repair or replacement of such Assets;
(h) preserve the Company's business organization intact and preserve
the good will of its customers, suppliers and others having business relations
with it;
(i) not discount, pre-bill or accept prepayment for any work to be
performed on or after the First Closing Date or otherwise invoice or bill
clients inconsistent with past practices; and
(j) promptly advise TL in writing of the commencement of, and of any
known threat to commence any Action or tax audit against the Company or of the
occurrence (or failure to occur) of any fact or circumstance which may become
known to the Principal Shareholders or the Company that would cause any of the
Principal Shareholders' or the Company's representations or warranties to be
inaccurate in any material respect.
5.2. Access to Information. The Principal Shareholders and the Company
will cooperate fully with TL and will provide TL and its accountants, counsel,
and other representatives, during normal business hours, full access to the
books and records of the Company and to the Assets, and full opportunity to
discuss the Company's business, affairs, and Assets with its officers,
employees, and independent accountants, and furnish to TL and its
representatives copies of such documents, records, and information with respect
to the affairs of the Company as TL or its representatives may reasonably
request.
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<PAGE>
5.3. The Company's and the Principal Shareholders' Representations and
Warranties. The Company and the Principal Shareholders shall use their best
efforts to maintain the truth and accuracy of all of the Company's and the
Principal Shareholders' representations and warranties set forth in this
Agreement and shall immediately notify TL of any fact or event of which the
Principal Shareholders have knowledge causing any of such representations or
warranties to be inaccurate and shall use best efforts to cure the same as soon
as practical, but in no event later than the First Closing Date.
5.4. Consents Required of the Principal Shareholders or the Company.
Prior to the First Closing Date, the Principal Shareholders shall obtain all
consents as may be necessary to authorize, approve or permit the full and
complete consummation of the transactions herein contemplated to occur at the
First Closing, including, without limitation, consents to the assignment of any
capital leases and the lease of the Premises and any Contracts.
5.5. Closing Balance Sheet. At or prior to the First Closing, the
Company shall deliver to TL the Company Closing Balance Sheet certified by the
Principal Shareholders as being true and correct and fairly presenting the
financial condition of the Company and estimating balances as of May 31, 1998.
Within thirty (30) days after the First Closing Date, the Company may deliver a
revised Company Closing Balance Sheet to TL, which shall replace the Company
Closing Balance Sheet previously delivered, reflecting any changes from the
estimated amounts, which revised balance sheet shall be considered the Company
Closing Balance Sheet hereunder for all purposes subject to further adjustment
during the Survival Period as a result of the audit of the Company Closing
Balance Sheet or a valid Claim. If the Net Worth of the Company reflected on
such Company Closing Balance Sheet is less than the amount disclosed as such in
Section 3.23 of this Agreement, such difference shall be deemed a Claim for the
purpose of Section 7.2 of this Agreement. The amount of any severance payments
to Gerald Gruber or Jennifer Lunsford that are incurred by the Company shall not
be included in the calculation of the Company's Net Worth as reflected on the
Company Closing Balance Sheet.
5.6. Accounting Treatment. The Principal Shareholders and the Company
shall take no action which would cause the Merger not to qualify for treatment
as a pooling-of-interests for accounting purposes.
5.7. Best Efforts. Subject to the other provisions of this Agreement,
the Principal Shareholders and the Company shall use their best efforts to cause
the conditions listed in Section 6.1 hereof to be satisfied as of the First
Closing Date. TL shall use its best efforts to cause the conditions listed in
Section 6.2 hereof to be satisfied as of the First Closing Date.
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<PAGE>
ARTICLE 6
CONDITIONS PRECEDENT TO THE CLOSINGS
6.1. Conditions Precedent to TL's Obligation in Respect of the First
Closing. The obligation of TL to consummate the First Closing shall be subject
to the satisfaction, or the waiver by TL, of the following conditions on or
prior to the respective Closing Date:
(a) Representations and Warranties; Compliance with Agreement. The
representations and warranties of the Company and the Principal Shareholders set
forth in this Agreement shall have been true and correct on the date of this
Agreement and shall be true and correct as of the First Closing Date as though
made on and as of such Closing Date, except for representations and warranties
that speak as of a specific date before the First Closing Date, and the
Principal Shareholders shall have performed in all material respects all
covenants and agreements to be performed by the Principal Shareholders under
this Agreement on or prior to the First Closing Date, and the Principal
Shareholders shall have delivered to TL a certificate to such effect dated such
Closing Date signed by the Principal Shareholders which certificate will be in
form and substance satisfactory to TL's counsel;
(b) Litigation Affecting Closing. On the First Closing Date, no
Action will be pending or threatened before any court or Governmental
Entity in which it is sought to restrain or prohibit or to obtain Damages or
other relief in connection with this Agreement or the consummation of the
transactions contemplated hereby, and no investigation that might eventuate in
any such Action will be pending or, to the best knowledge of the Principal
Shareholders, threatened;
(c) Required Consents. On or prior to the First Closing, the holders
of any indebtedness of the Company, the lessors of any Assets leased by
the Company, the parties to any Contract, any Governmental Entity or any other
Person which owns or has authority to grant any franchise, license, Permit,
easement, right or other authorization necessary for the business or operations
of the Company, and any Governmental Entity having jurisdiction over the Company
or the Principal Shareholders, to the extent that consent or approval of any of
the foregoing is required under the pertinent debt, lease, contract, commitment
or agreement or other document or instrument or under applicable laws for the
consummation of the transactions in the manner in this Agreement provided (or
without whose consent there would be a default under such debt, lease, contract,
commitment or agreement or other document or instrument or under applicable
Laws), have granted such consent or approval or, in the case of required filings
or certifications to Governmental Entities, the Principal Shareholders and the
Company shall have made such filings or certifications;
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<PAGE>
(d) Due Diligence Investigation. TL and its representatives are
satisfied with the results of their due diligence investigation of the Company
on or prior to the First Closing;
(e) Opinion of Counsel for the Company. Hogan & Hartson LLP, counsel
for the Company, shall have delivered to TL an opinion, dated as of the
First Closing Date, in the form attached to this Agreement as Exhibit 6.1(e);
(f) Opinion of Counsel for the Principal Shareholders. Gibson Dunn &
Crutcher LLP, counsel for the Principal Shareholders (other than Cameron), shall
have delivered to TL an opinion, dated as of the First Closing Date, in the form
attached to this Agreement as Exhibit 6.1(f);
(g) No Damage to Business. On or prior to the First Closing, the
Company shall not have suffered, and there shall not be, or likely to
be, a Material Adverse Effect and the Assets shall not have been and shall not
be threatened to be adversely affected in any way as a result of fire,
explosion, earthquake, disaster, accident, labor dispute, any action by any
Governmental Entity, flood, drought, embargo, riot, civil disturbance, uprising,
activity of armed forces or act of God or public enemy;
(h) Approval of Counsel; Corporate Matters. All actions, proceedings,
resolutions, instruments and documents required to carry out this Agreement, or
incidental hereto, and all other related legal matters shall have been approved
on the First Closing Date by counsel for TL in the exercise of his reasonable
judgment;
(i) Escrow Agreement. The Escrow Agreement will have been duly
executed and delivered by the appropriate parties;
(j) Pooling Letter. TL shall have received a letter in a form and
substance satisfactory to TL from the Auditor dated as of the First Closing Date
stating that the Merger will qualify as a pooling-of-interests under Opinion 16
of the Accounting Principles Board;
(k) Minimum Share Values. The Value of a share of MedQuist Common
shall be no less than Thirty-Eight Dollars ($38.00); and
(l) Resignations. The officers and directors of the Company shall
have tendered their unconditional resignations from the Company.
6.2. Obligation of the Principal Shareholders in Respect of the First
Closing. The obligation of the Principal Shareholders to consummate the First
Closing shall be subject to
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<PAGE>
the satisfaction by TL or the waiver by the Principal Shareholders of the
following conditions on or prior to the First Closing Date:
(a) Representations and Warranties. The representations and
warranties of TL set forth in Article 4 of this Agreement shall have
been true and correct as of the date of this Agreement and shall be true and
correct as of the First Closing Date as though made on and as of the First
Closing Date, except for representations and warranties that speak as of a
specific date before the First Closing Date, and TL shall have performed in all
material respects all covenants and agreements to be performed by it under this
Agreement on or prior to the First Closing Date, and TL shall have delivered to
the Principal Shareholders a certificate to such effect, dated the First Closing
Date and signed by an authorized officer, which certificate will be in form and
substance satisfactory to the Principal Shareholders and their counsel;
(b) Litigation Affecting Closing. On the First Closing Date, no
Action will be pending or threatened before any court or Governmental
Entity in which it is sought to restrain or prohibit or to obtain Damages or
other relief in connection with this Agreement or the consummation of the
transactions contemplated hereby, and no investigation that might eventuate in
any such Action will be pending or threatened; and
(c) Maximum Share Values. The Value of a share of MedQuist Common
shall be no greater than Fifty-Two Dollars ($52.00).
6.3. Conditions Precedent in Respect of the Second Closing. The
obligation of MedQuist, TL and the Company to consummate the Second Closing
shall be subject to the Securities and Exchange Commission having declared
effective the registration statement of MedQuist on Form S-4 necessary to
register under the Act the shares of MedQuist Common issuable to the Public
Shareholders in connection with the Merger.
ARTICLE 7
SURVIVAL AND SHARE ADJUSTMENT
7.1. Survival of Representations and Warranties; Insurance Proceeds. The
representations and warranties of the Company, the Principal Shareholders and TL
under this Agreement will terminate at the First Closing, except that the
representations and warranties with respect to Sections 3.5 (Financial
Statements; Reports), 3.6 (No Undisclosed Liabilities) 3.13 (Taxes), 3.16
(Assets), 3.22 (Accounts Receivable) and 3.23 (Net Worth) (each a "Surviving
Warranty") shall survive the First Closing until the earlier of (a) the
completion of the first independent audit, following the First Closing Date, of
the consolidated financial statements of MedQuist in which the Surviving
Corporation's financial statements are included, or (b) one (1) year from the
date of this Agreement (the "Survival Period").
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7.2. Adjustment of Shares. If, prior to the expiration of the Survival
Period, TL in good faith determines that the Company or the Principal
Shareholders breached a Surviving Warranty as of the First Closing Date and TL
incurs, or becomes reasonably likely to incur, Damages as a result of such
breach (a "Claim"), then TL shall deliver a notice of Claim ("Claim Notice") to
the Escrow Agent and the Principal Shareholders setting forth the nature of such
Claim and the estimated amount of Damages from such Claim. If the Principal
Shareholders do not object or are deemed not to have objected pursuant to
Section 7.3 below, TL shall be entitled to have the Escrow Agent return and the
Escrow Agent shall return to TL such number of the Escrowed Shares having a
Value equal to the aggregate dollar amount of TL's Damages set forth in the
Claim Notice, up to the total number of Escrowed Shares then held by the Escrow
Agent. If the Principal Shareholders dispute the amount of Damages set forth in
any Claim Notice, the Escrow Agent shall return to TL such of the Escrowed
Shares as are not subject to such dispute and the number of Escrowed Shares that
are the subject of such dispute shall be held by the Escrow Agent until such
dispute is resolved hereunder. If any of such Escrowed Shares are returned to TL
in accordance with the preceding two sentences, then such action shall be
considered an adjustment to the Aggregate Merger Consideration. At the
expiration of the Survival Period, the Escrow Agent shall deliver to the
Shareholders any of the Escrowed Shares then in the Escrow Agent's possession;
provided, however, that if there is any pending or asserted Claim pursuant to
which a Claim Notice has been delivered by TL prior to the expiration of the
Survival Period the Escrow Agent shall not deliver the Shareholders such number
of Escrowed Shares as is equal to the lesser of (i) the product of (A) the
number of Escrowed Shares multiplied by (B) the Value and (ii) such number of
Escrowed Shares multiplied by the Value as is equal to the amount of such Claim
set forth in the Claim Notice, until such Claim is resolved.
7.3. Dispute Notice. The Principal Shareholders will, within twenty (20)
days after receipt of a Claim Notice, deliver to TL and the Escrow Agent a
written notice ("Dispute Notice") stating either that the Principal Shareholders
agree with TL's Claim or that they object in good faith to the validity of such
Claim and setting forth in reasonable detail the grounds on which the Principal
Shareholders are contesting the validity of the Claim. Any failure of the
Principal Shareholders to deliver such Dispute Notice within such twenty (20)
day period shall be conclusively deemed to be acceptance of such adjustment. In
the event the Principal Shareholders do not withdraw their Dispute Notice or the
Claim set forth in any Claim Notice has not been conclusively resolved prior to
the expiration of the Survival Period, the Escrow Agent shall continue to retain
under the Escrow Agreement the number of Escrowed Shares determined under the
proviso of the last sentence of Section 7.2.
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ARTICLE 8
CONDUCT OF THE PRINCIPAL SHAREHOLDERS AND TL AFTER CLOSING
8.1. Additional Actions and Cooperation. TL and the Principal
Shareholders will cooperate upon and after the First Closing Date in effecting
the orderly combination of the Company and TL pursuant to the Merger. In
addition, after the First Closing Date, at the request of either party, the
other party will execute and deliver from time to time such further instruments
of assignment, conveyance and transfer, will cooperate in the conduct of
litigation and the processing and collection of insurance claims, and will take
such other actions as may reasonably be required to effect the Merger and
otherwise to accomplish the orderly combination of the Company and TL as
contemplated by this Agreement.
8.2. Registration Statements. As soon as reasonably practicable after
the First Closing Date, MedQuist shall prepare and file with the SEC (a) a
Registration Statement on Form S-3 for the purpose of registering for resale the
shares of MedQuist Common issued to the Principal Shareholders pursuant to this
Agreement, and (b) a Registration Statement on Form S-4 for the purpose of
registering the shares of MedQuist Common to be issued to the Public
Shareholders pursuant to this Agreement. MedQuist shall use commercially
reasonable efforts to (i) respond promptly to SEC comments, if any, and (ii)
cause such registration statements to be declared effective by the SEC.
8.3. Closing Balance Sheet Audit. At any time following the First
Closing Date, but no later than the completion of the first independent audit,
following the First Closing Date, of the consolidated financial statements of
MedQuist in which the Surviving Corporation's financial statements are included,
TL shall have the right to cause the Auditor to complete an audit of the Company
Closing Balance Sheet.
8.4. Taxes and Tax Returns. The Principal Shareholders and TL will each
provide the other (i) such assistance as may reasonably be requested by any of
them in connection with the preparation of any return, audit or other
examination by any taxing authority or judicial or administrative proceeding
relating to liability for Taxes, (ii) copies of all notices from any taxing
authority or other governmental agency or authority concerning Taxes and (iii)
such assistance as may reasonably be requested by any of them in connection with
the preparation and filing on or before July 31, 1998 of Tax Returns and Form
W-2's for employees of the Company relating to periods on or prior to the First
Closing Date. Except to the extent reflected on the Company Closing Balance
Sheet, the Principal Shareholders shall be responsible for the payment of all
Taxes relating to the operation of the Company at any time prior to the First
Closing Date.
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8.5. Retention of Shares by Principal Shareholders. Following the First
Closing, the Principal Shareholders shall not sell, assign, transfer, pledge,
grant options with respect to, acquire the right to put to another Person, or in
any other way reduce their risk relative to any shares of MedQuist Common
received in connection with the exchange at the First Closing until such time as
the financial results covering at least thirty (30) days of consolidated
operations of MedQuist following the First Closing, including the Surviving
Corporation for such thirty (30) day period, have been publicly reported by
MedQuist or enter into any agreement with respect to the foregoing.
ARTICLE 9
TERMINATION OF AGREEMENT
9.1. Termination. This Agreement may be terminated prior to the First
Closing as follows:
(a) at the election of the Principal Shareholders, if any one or more
of the conditions to its obligation to complete the First Closing as set
forth in Section 6.2 above has not been fulfilled by June 30, 1998;
(b) at the election of TL, if any one or more of the conditions to
its obligation to complete the First Closing as set forth in Section 6.1
above has not been fulfilled by June 30, 1998;
(c) at the election of the Principal Shareholders, if TL has
materially breached any material representation, warranty, covenant or
agreement contained herein required to occur or be performed on or prior to the
First Closing Date;
(d) at the election of TL, if any of the Company or the Principal
Shareholders has materially breached any material representation, warranty,
covenant or agreement contained herein;
(e) at the election of any of the parties if any action shall have
been instituted and be continuing by any Governmental Authority with
proper authority to restrain, modify or prohibited carrying out of the
transactions contemplated hereby; or
(f) at any time on or prior to the First Closing Date, by mutual
written consent of the Principal Shareholders and TL.
If TL or the Principal Shareholders, as the case may be, elects to
terminate this Agreement pursuant to Section 9.1(a), (b), (c), (d), or (e)
hereof, the terminating party shall
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deliver a notice to the other party hereto declaring its election to so
terminate this Agreement in accordance with the provisions of Section 9.1(a),
(b), (c), (d), or (e), as the case may be, and setting forth therein the basis
for such termination.
If this Agreement so terminates, it shall become null and void and have
no further force or effect, except as provided in Section 9.2 hereof.
9.2. Survival. If this Agreement is terminated, this Agreement shall
become void and of no further force and effect, except for the provisions of
this Article 9 and Article 11 hereof; which provisions shall survive the
termination hereof. None of the parties hereto shall have any liability in
respect to a termination of this Agreement pursuant to this Article 9, except to
the extent that a party's failure to satisfy the conditions of Article 6,
results from the intentional or willful breach or violation of the
representations, warranties, covenants or agreements of such party under this
Agreement. For purposes of the preceding sentence, the failure of any party to
comply with, or perform, its respective obligations under Article 2 promptly
after all conditions to such compliance shall have been fulfilled, shall
constitute an intentional or willful violation of the agreement herein contained
by such failing party.
ARTICLE 10
INDEMNIFICATION
10.1. Director and Officer Indemnification.
(a) From and after the First Closing Date, TL and MedQuist agree to
assume any obligation of the Company existing on the date hereof, to the extent
of any such obligation, to indemnify and hold harmless each present and former
director and officer of the Company (the "Indemnified Parties"), against Damages
incurred in connection with claims, actions, suits, proceedings or
investigations, whether civil, criminal, administrative or investigative,
asserted or instituted not later than the third (3rd) anniversary of the
Effective Time and arising out of or pertaining to matters arising out of or in
connection with such party's position as, or actions taken as, a director or
officer of the Company at or prior to the Effective Time, to the fullest extent
permitted by the Company's certificate of incorporation and bylaws, as in effect
on the date hereof, (and also advance expenses incurred to the fullest extent
provided thereunder upon receipt of any undertaking permitted by applicable law
or such certificate of incorporation and bylaws); provided, however, that TL or
MedQuist shall not have any obligation hereunder to any Indemnified Party when
and if a court of competent jurisdiction shall ultimately determine, and such
determination shall have become final and nonappealable, that the
indemnification of such Indemnified Party in the manner contemplated hereby is
not required. If such indemnity is determined not to be available, then TL or
MedQuist and each of the Indemnified Parties shall contribute to the amount
payable in such proportion as is appropriate to reflect relative faults and
benefits and other relevant equitable considerations.
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(b) Any Indemnified Party wishing to claim indemnification under
Section 10.1(a), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify TL and MedQuist thereof, but the failure to
so notify shall not relieve TL and MedQuist of any liability it may have to such
Indemnified Party if such failure does not materially prejudice TL and MedQuist.
In the event of any such claim, action, suit, proceeding or investigation
(whether arising before or after the Effective Time): (i) TL and MedQuist shall
have the right to assume the defense thereof and TL and MedQuist shall not be
liable to such Indemnified Parties for any legal expenses of other counsel or
any other expenses subsequently incurred by such Indemnified Parties in
connection with the defense thereof; (ii) the Indemnified Parties will cooperate
in the defense of any such matter; and (iii) TL and MedQuist shall not be liable
for any settlement affected without its prior written consent, which shall not
be unreasonably withheld.
(c) TL and MedQuist shall have the right, but not the obligation, to
purchase and maintain such insurance as it deems appropriate to cover all or any
part of its obligations under this Article 10.
ARTICLE 11
GENERAL
11.1. Entire Agreement; Amendments. This Agreement constitutes the
entire understanding among the parties with respect to the subject matter
contained in this Agreement and therein and supersedes any prior understandings
and agreements among them respecting such subject matter. This Agreement may be
amended or supplemented only by a written instrument duly executed by all of the
parties.
11.2. Headings. The headings in this Agreement are for convenience of
reference only and will not affect its interpretation.
11.3. Gender; Number. Words of gender may be read as masculine,
feminine, or neuter, as required by context. Words of number may be read as
singular or plural, as required by context.
11.4. Exhibits and Schedules. Each Exhibit and Schedule referred to in
this Agreement is incorporated into this Agreement by such reference.
11.5. Severability. If any provision of this Agreement is held illegal,
invalid, or unenforceable, such illegality, invalidity, or unenforceability will
not affect any other provision hereof. This Agreement will, in such
circumstances, be deemed modified to the extent necessary to render enforceable
the provisions hereof.
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<PAGE>
11.6. Notices. All notices and other communications hereunder will be in
writing and will be given to the person either personally or by sending a copy
thereof by first class mail, courier services, charges prepaid, hand delivery,
or by telecopier, to such party's address (or to such party's telecopier
number). If the notice is sent by courier services, it will be deemed to have
been given to the person entitled thereto when deposited with the courier
service for delivery to that person or, in all other cases, when dispatched.
If to MedQuist or TL to:
MedQuist Inc.
Five Greentree Centre
Suite 311
Marlton, NJ 08053
Attention: John M. Suender,
Vice President Acquisitions
Telecopy: 609-596-6337
Telephone: 609-596-8877
with a copy to:
James D. Rosener
Pepper Hamilton LLP
1235 Westlakes Drive
Suite 400
Berwyn, PA 19312
Telecopy: 610-640-7835
Telephone: 610-640-7817
If to the Principal Shareholders to:
Proactive Partners L.P.
50 Osgood Place
San Francisco, CA 94133
Telecopy:
Telephone:
- and -
Richard D. Cameron
1914 Beulah Road
Vienna, VA 22182
Telecopy: 713-319-8186
Telephone: 703-319-2091
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<PAGE>
with a copy to:
David Martin
Hogan & Hartson
13th Street, NW
Washington, DC 20004
Telephone: 202-637-5910
Telecopy: 202-637-6858
Notice of any change in any such address will also be given in the
manner set forth above. Whenever the giving of notice is required, the giving of
such notice may be waived by the party entitled to receive such notice.
11.7. Waiver. The failure of any party to insist upon strict performance
of any of the terms or conditions of this Agreement will not constitute a waiver
of any of its rights hereunder.
11.8. Assignment. No party may assign any of its rights or delegate any
of its obligations hereunder without the prior written consent of the other
parties, except that TL shall have the right to assign its rights hereunder to a
corporation owned or controlled by TL or which owns or controls TL.
11.9. Successors and Assigns. Except as set forth in Section 11.8, this
Agreement binds, inures to the benefit of, and is enforceable by the successors,
assigns, heirs and personal representatives of the parties, and does not confer
any rights on any other persons or entities.
11.10. Governing Law. This Agreement will be construed and enforced in
accordance with the laws of the State of New Jersey, notwithstanding the
conflict of laws principles of any jurisdiction.
11.11. No Benefit to Others. The representations, warranties, covenants
and agreements contained in this Agreement are for the sole benefit of the
parties hereto and their successors and assigns, and they will not be construed
as conferring and are not intended to confer any rights on any other persons.
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<PAGE>
11.12. Public Announcements. Except as required under applicable laws,
and for any joint press releases of the Company, the Principal Shareholders TL
and MedQuist, no party shall issue a report, statement or press release with
respect to the execution or closing of this Agreement prior to the consultation
with and approval of the other party.
11.13. Counterparts. This Agreement may be executed in any
number of counterparts and any party hereto may execute any such counterpart,
each of which when executed and delivered will be deemed to be an original and
all of which counterparts taken together will constitute but one and the same
instrument. The execution of this Agreement by any party hereto will not become
effective until counterparts hereof have been executed by all the parties
hereto. It will not be necessary in making proof of this Agreement or any
counterpart hereof to produce or account for any of the other counterparts.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
TRANSCRIPTIONS, LTD.
/s/ David A. Cohen
--------------------------------
David A. Cohen, President
MEDQUIST INC.
/s/ David A. Cohen
--------------------------------
Name: David A. Cohen
Title: President
DIGITAL DICTATION, INC.
/s/ Richard D. Cameron
--------------------------------
Richard D. Cameron, President
PROACTIVE PARTNERS, L.P.
By: Proactive Investment Managers, L.P.,
General Partner
By: /s/ Charles C. McGettigan
----------------------------
Charles C. McGettigan,
General Partner
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
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<PAGE>
LAGUNITAS PARTNERS, L.P.
By: Gruber & McBaine
Capital Management, LLC,
----------------------------
General Partner
By: /s/ Jon D. Gruber
----------------------------
Jon D. Gruber, Manager
GRUBER & MCBAINE INTERNATIONAL
By: /s/ Robert T. Arnott
---------------------------
Name: Robert T. Arnott
Title: Director
/s/ Richard D. Cameron
--------------------------------
RICHARD D. CAMERON
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