SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 1, 1999
MEDQUIST INC.
---------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
New Jersey 0-19941 23-2531298
- ------------------------------- ------------------------ ---------------------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
Five Greentree Centre
Suite 311
Marlton, New Jersey 08053
----------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (609) 596-8877
-------------
<PAGE>
Item 5. Other Events.
On November 30, 1998, the Registrant entered into an Agreement and Plan of
Merger to acquire Transcriptions Ltd. of Florida, Inc. ("TLF"). Closing of the
transaction was completed on November 30, 1998. The Registrant issued
approximately 809,000 shares of its common stock.
On September 18, 1998, the Registrant entered into an Agreement and Plan of
Merger to acquire The MRC Group, Inc. ("MRC"). Closing of the transaction was
completed on December 10, 1998. The Registrant issued approximately 8.61 million
shares of its common stock and assumed all MRC options. MRC shareholders now own
approximately 26% of the common stock of Registrant. The financial statements of
MRC were previously filed for the periods specified in Rule 3-05(b) of
Regulation S-X as part of the Registrant's November 2, 1998 Registration
Statement on Form S-4 (Registration Statement No. 333-66447) (the "November 2,
1998 S-4") and were incorporated by reference thereto in the Registrant's
Current Report on Form 8-K filed on December 15, 1998. In addition, pro-forma
financial information required to be filed pursuant to Article 11 of Regulation
S-X was previously filed as part of the Registrant's November 2, 1998 S-4 and
incorporated by reference thereto into the Registrant's Current Report on Form
8-K filed on December 15, 1998.
Both the TLF and the MRC mergers were accounted for as
pooling-of-interests. Accordingly, the Company's consolidated financial
statements have been retroactively restated to reflect the merger with MRC.
Item 7. Financial Statements and Exhibits.
The following financial statements and exhibits are being filed as part of
this report:
(a) Financial Statements
MEDQUIST INC. AND SUBSIDIARIES
Report of Independent Public Accountants
Supplemental Consolidated Balance Sheets, December 31, 1996 and 1997
Supplemental Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997
Supplemental Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1995, 1996 and 1997
Supplemental Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997
Notes to Supplemental Consolidated Financial Statements
Supplemental Consolidated Balance Sheets, December 31, 1997 and June 30,
1998 (unaudited)
Supplemental Unaudited Consolidated Statements of Operations for the nine
months ended September 30, 1997 and 1998
<PAGE>
Supplemental Unaudited Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1998
Notes to Supplemental Unaudited Consolidated Financial Statements
(b) Exhibits
23.1 Consent of Arthur Andersen LLP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MEDQUIST INC.
By: /s/ John M. Suender
---------------------------
John M. Suender
Senior Vice President and
General Counsel
Date: March 1, 1999
-------------
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
MEDQUIST INC. AND SUBSIDIARIES
Report of Independent Public Accountants ............................................. F-2
Supplemental Consolidated Balance Sheets, December 31, 1996 and 1997 ................. F-3
Supplemental Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997 ............................................................. F-4
Supplemental Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1996 and 1997 ................................................ F-5
Supplemental Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 ............................................................. F-6
Notes to Supplemental Consolidated Financial Statements .............................. F-7
Supplemental Consolidated Balance Sheets, December 31, 1997 and June 30, 1998
(unaudited) ..................................................................... F-25
Supplemental Unaudited Consolidated Statements of Operations for the nine months ended
September 30, 1997 and 1998 ..................................................... F-26
Supplemental Unaudited Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1998 ..................................................... F-27
Notes to Supplemental Unaudited Consolidated Financial Statements .................... F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MedQuist Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
MedQuist Inc. (a New Jersey corporation) and Subsidiaries as of December 31,
1996 and 1997, and the related supplemental consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. The supplemental consolidated statements
give retroactive effect to the Company's mergers with The MRC Group, Inc. on
December 10, 1998 and Transcriptions Ltd. of Florida, Inc. on November 30, 1998,
which have been accounted for as pooling-of-interests, as described in Note 1.
These supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
MedQuist Inc. and its subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, after giving retroactive effect to the
mergers with The MRC Group, Inc. on December 10, 1998 and Transcriptions Ltd. of
Florida, Inc. on November 30, 1998 as described in Note 1, all in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
December 22, 1998
F-2
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31
---------------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 14,940 $ 14,489
Short-term investments ................................................ 3,002 4,003
Accounts receivable, net of allowance of $1,032 and $1,298 ............ 32,315 41,819
Deferred income taxes ................................................. 3,022 2,871
Prepaid expenses and other ............................................ 665 307
-------- --------
Total current assets ................................... 53,944 63,489
Property and equipment, net .............................................. 21,298 25,442
Intangible assets, net ................................................... 79,531 82,382
Other .................................................................... 3,778 2,154
-------- --------
$158,551 $173,467
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ..................................... $ 4,391 $ 6,792
Accounts payable ...................................................... 4,976 5,777
Accrued payroll ....................................................... 5,663 7,175
Accrued expenses ...................................................... 5,431 7,443
-------- --------
Total current liabilities .............................. 20,461 27,187
-------- --------
Long-term debt ........................................................... 9,964 7,589
Other long-term liabilities .............................................. 1,219 1,130
Deferred income taxes .................................................... 6,197 6,188
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock, no par value, 60,000 shares authorized, 31,428 and 32,138
shares issued and outstanding ....................................... -- --
Additional paid-in capital ............................................ 115,978 119,008
Retained earnings ..................................................... 4,732 12,365
-------- --------
Total shareholders' equity ............................. 120,710 131,373
-------- --------
$158,551 $173,467
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1995 1996 1997
--------- ---------- ---------
<S> <C> <C> <C>
Revenues ............................................ $ 109,657 $ 152,109 $ 216,158
Costs and expenses:
Cost of revenues ................................. 86,265 118,359 168,596
Selling, general and administrative .............. 9,144 12,527 15,001
Depreciation ..................................... 5,752 7,372 10,339
Amortization ..................................... 896 3,150 5,652
Restructuring charges ............................ 347 644 2,075
--------- --------- ---------
Total operating expenses .......... 102,404 142,052 201,663
Operating income .................................... 7,253 10,057 14,495
Interest expense, net ............................... 4,252 2,049 469
--------- --------- ---------
Income from continuing operations before income taxes 3,001 8,008 14,026
Income tax provision ................................ 640 2,720 5,293
--------- --------- ---------
Income from continuing operations ................... 2,361 5,288 8,733
Discontinued operations, net of income taxes:
Income from operations ......................... 1,451 -- --
Loss on disposal ............................... (3,180) -- --
--------- --------- ---------
Income before extraordinary item .................... 632 5,288 8,733
Loss on early extinguishment of debt, net of
income tax benefit ............................... (545) -- --
--------- --------- ---------
Net income .......................................... 87 5,288 8,733
Inducement of warrant exercise ...................... -- (707) --
--------- --------- ---------
Net income available to common shareholders ......... $ 87 $ 4,581 $ 8,733
========= ========= =========
Basic income per common share (Note 1):
Income from continuing operations ................ $ 0.23 $ 0.22 $ 0.28
Discontinued operations .......................... (0.17) -- --
Extraordinary item ............................... (0.05) -- --
Inducement of warrant exercise ................... -- (0.03) --
--------- --------- ---------
$ 0.01 $ 0.19 $ 0.28
========= ========= =========
Diluted income per common share (Note 1):
Income from continuing operations ................ $ 0.22 $ 0.20 $ 0.26
Discontinued operations .......................... (0.16) -- --
Extraordinary item ............................... (0.05) -- --
Inducement of warrant exercise ................... -- (0.03) --
--------- --------- ---------
$ 0.01 $ 0.17 $ 0.26
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 ........................ 10,419 $ -- $ 9,860 $ 2,490 $ 12,350
Net income ..................................... -- -- -- 87 87
Exercise of Common stock options,
including tax benefit ........................ 556 -- 1,506 -- 1,506
Merger costs ................................... -- -- (51) -- (51)
Distributions .................................. -- -- -- (1,498) (1,498)
Issuance of Common stock in connection with
business acquisition ......................... 70 -- 185 -- 185
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 ........................ 11,045 -- 11,500 1,079 12,579
Net income ..................................... -- -- -- 5,288 5,288
Exercise of Common stock options,
including tax benefit ........................ 98 -- 336 -- 336
Issuance of Common stock in connection with
business acquisitions ........................ 4,773 -- 10,751 -- 10,751
Sale of Common stock, net of expenses .......... 12,532 -- 86,707 -- 86,707
Distributions .................................. -- -- -- (928) (928)
Exercise of warrants, including
inducement charge ............................ 3,016 -- 6,980 (707) 6,273
Purchase and retirement of Common stock, at cost
(36) -- (296) -- (296)
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 ........................ 31,428 -- 115,978 4,732 120,710
Net income ..................................... -- -- -- 8,733 8,733
Exercise of Common stock options,
including tax benefit ........................ 533 -- 2,377 -- 2,377
Sale of Common stock, net of expenses .......... 33 -- 251 -- 251
Distributions .................................. -- -- -- (1,100) (1,100)
Purchase and retirement of Common stock, at cost
(82) -- (676) -- (676)
Exercise of warrant, including
tax benefit .................................. 226 -- 1,078 -- 1,078
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ........................ 32,138 $ -- $ 119,008 $ 12,365 $ 131,373
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................. $ 87 $ 4,581 $ 8,733
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization .......................... 8,295 10,522 15,991
Amortization of debt discounts ......................... 131 704 --
Loss on disposal of discontinued operations ............ 4,286 -- --
Loss on early extinguishment of debt ................... 545 -- --
Deferred income tax provision (benefit) ................ (146) 1,813 (200)
Loss (gain) on disposal of property .................... (1) -- 223
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures--
Accounts receivable, net ........................... (908) (5,571) (7,230)
Prepaid expenses and other ......................... 452 1,403 631
Other assets ....................................... (26) 182 (362)
Accounts payable ................................... 303 (1,983) 543
Accrued payroll .................................... (244) 773 817
Accrued expenses ................................... (123) (1,605) 2,358
Other long-term liabilities ........................ (91) (79) (87)
-------- -------- --------
Net cash provided by operating activities .......... 12,560 10,740 21,417
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment ........................ (7,065) (6,509) (13,716)
Acquisitions, net of cash acquired ......................... (1,825) (26,205) (5,628)
Proceeds from divestiture .................................. 16,723 -- --
Sale (purchase) of investments ............................. 2,400 (5,893) 973
-------- -------- --------
Net cash provided by (used in)investing activities.. 10,233 (38,607) (18,371)
-------- -------- --------
FINANCING ACTIVITIES:
Repayments of long-term debt and subordinated payable ...... (24,485) (38,728) (3,757)
Proceeds from issuance of long-term debt ................... 5,000 7,057 --
Borrowing under line of credit ............................. 265 64 --
Merger costs ............................................... (51) -- --
Distributions .............................................. (1,506) (973) (1,100)
Proceeds from exercise of Common stock options ............. 296 226 1,277
Net proceeds from issuance of Common stock ................. 796 68,714 251
Purchase and retirement of Common stock, at cost ........... -- (296) (676)
Deferred financing costs ................................... (178) -- --
Proceeds from exercise of warrants ......................... -- -- 508
-------- -------- --------
Net cash provided by (used in) financing activities (19,863) 36,064 (3,497)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... 2,930 8,197 (451)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR .................................................... 3,813 6,743 14,940
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR ........................ $ 6,743 $ 14,940 $ 14,489
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background
MedQuist Inc. (the "Company" or "MedQuist") is a leading national provider of
electronic transcription and document management services to the health care
industry in the United States. MedQuist was incorporated in New Jersey in 1987
as a group of outpatient health care businesses affiliated with a nonprofit
health care provider. In May 1994, Transcriptions, Ltd. was acquired (see Note
2). In November 1995, the Company discontinued its receivables management
business. The operations and net assets of the receivables management business
and the outpatient businesses, which together formed one business segment, have
been accounted for as discontinued operations (see Note 3).
Basis of Presentation
On May 28, 1998, the Company consummated the acquisition of Digital Dictation,
Inc. ("DDI"). The acquisition was accounted for using the pooling-of-interests
method of accounting and the Company's historical financial statements were
retroactively restated to reflect the combination with DDI. The restated
financial statements were issued in Item 5 of the Company's June 30, 1998
quarterly report on Form 10-Q.
On August 18, 1998, the Company consummated the acquisition of Signal
Transcription Network, Inc. ("Signal"). The acquisition was accounted for using
the pooling-of-interests method of accounting and the Company's historical
financial statements were retroactively restated to reflect the Combination with
Signal. The restated financial statements were issued in Item 5 of the Company's
September 30, 1998 quarterly report on Form 10-Q.
On November 30, 1998 and December 10, 1998, the Company consummated the
acquisitions of Transcriptions Ltd. of Florida, Inc. ("TLF") and The MRC Group,
Inc. ("MRC"), respectively, which will be accounted for using the
pooling-of-interests method. Accounting Principles Board Opinion No. 16
precludes the restatement of financial statements for a pooling-of-interests
transaction prior to the issuance of financial statements covering a period
encompassed by the transaction. Accordingly, the accompanying consolidated
financial statements set forth a supplemental presentation of the Company's
financial statements, retroactively restated to reflect the combinations with
TLF and MRC (see Note 11). The accompanying supplemental consolidated financial
statements do not include the estimated transaction costs related to the TLF and
MRC acquisitions of $9,500, and costs associated with known bonus and severance
arrangements with former MRC employees of approximately $1,600, which will be
charged to expense in the quarter ended December 31, 1998. In addition, the
Company expects to record a restructuring charge in the quarter ended December
31, 1998 for certain costs associated with combining the companies, primarily
severance and duplicate facility leases.
F-7
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Pro Forma Presentation for Signal and TLF Income Taxes
Prior to their mergers with the Company, Signal and TLF were taxed as "S"
Corporations. Accordingly, no tax provision is included in the accompanying
supplemental financial statements related to Signal and TLF's income. The
following pro forma presentation sets forth the Company's supplemental income
tax provision, income from continuing operations and income from continuing
operations per share as if Signal and TLF had been taxed as "C" Corporations for
all periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Income from continuing operations before income
taxes, as reported ................................. $ 3,001 $ 8,008 $14,026
Pro forma income tax provision ....................... 1,312 3,357 5,975
------- ------- -------
Pro forma income from continuing operations .......... $ 1,689 $ 4,651 $ 8,051
======= ======= =======
Pro forma income per share from continuing operations:
Basic ........................................... $ 0.16 $ 0.19 $ 0.25
Diluted ......................................... $ 0.16 $ 0.18 $ 0.24
</TABLE>
Common Stock Splits
On September 9, 1997, the Company effected a three-for-two stock split for all
shares of Common stock. Further, on June 15, 1998, the Company effected a
two-for-one stock split for all shares of Common stock. All share data in the
accompanying financial statements has been retroactively adjusted to reflect
both stock splits.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported assets and liabilities and contingency disclosures at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Fees for transcription-related services are based primarily on contracted rates,
and revenue is recognized upon the rendering of services and delivery of
records.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments purchased
with an original maturity of three months or less, consisting primarily of cash
on deposit with banks. At December 31, 1997, cash and cash equivalents included
a restricted certificate of deposit of $1,339 which was used to repay a note
payable in January 1998.
F-8
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Investments
Investments held by the Company consist primarily of investments in
high-quality, fixed-income bonds with varying maturities and rates. At December
31, 1996 and 1997, these investments totaled $5,975 and $4,003, respectively,
and are included in short-term investments and long-term other assets in the
accompanying supplemental consolidated balance sheets. In accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," debt securities that the Company has
both the intent and ability to hold to maturity are carried at amortized cost.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization have
been provided using the straight-line method over the estimated useful lives of
the assets, which range from two to seven years for furniture, equipment and
software, and the lease term for leasehold improvements. Repairs and maintenance
costs are charged to expense as incurred. Additions and betterments are
capitalized. Gains or losses on disposals are charged to operations. Certain
internally developed software costs totaling $171, have been capitalized in 1997
in accordance with the AICPA's Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which was
early adopted by DDI prior to its merger with the Company. These costs include
$142 of salaries and fringe benefits for software developers and $29 of
telecommunications and outside consultant costs. Such costs will be amortized,
beginning in 1998, using the straight-line method over the estimated useful life
of five years.
Intangible Assets
Intangible assets consist primarily of the excess of cost over the net asset
value of acquired businesses, customer lists, non-compete agreements and
employee bases. The excess of cost over the net asset value related to the May
1994 acquisition of Transcriptions, Ltd. (see Note 2) is being amortized over 40
years. The excess of cost over the net asset value related to other acquisitions
is being amortized over 20-30 years. Customer lists and employee bases are being
amortized over 10-20 years and five years, respectively. Non-compete agreements
are amortized over their terms, ranging from 1.5 years to four years. Subsequent
to its acquisitions, the Company continually evaluates whether later events and
circumstances have occurred that indicate that the remaining estimated useful
life of intangible assets may warrant revision or that the remaining balance may
not be recoverable. When factors indicate that intangible assets should be
evaluated for possible impairment, the Company uses an estimate of the related
undiscounted cash flows in measuring whether the intangible asset should be
written down to fair value. Measurement of the amount of the impairment will be
based on appraisal, market value of similar assets or estimated discounted
future cash flows resulting from the use and ultimate disposition of the assets.
As of December 31, 1997, management believes that no revision to the remaining
useful lives or write-down of intangible assets is required.
Preferred Stock Investment
During 1997, MRC invested $1,200 for an approximate 10% preferred stock equity
interest in Articulate Systems, Inc. The investment has been accounted for under
the cost method of accounting and is included in long-term other assets in the
accompanying supplemental consolidated balance sheets.
F-9
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
MRC Restructuring Charges
In 1995, MRC's board of directors approved a management plan to close certain
client service centers (CSC's) in order to reduce costs and improve operating
efficiencies. The cost of implementing the plan totaled approximately $347 and
was primarily related to long-term non-cancelable leases. The charge was
recognized in 1995 in accordance with the criteria set forth in EITF 94-3;
Liability Recognition For Costs to Exit An Activity (Including Certain Costs
Incurred In A Restructuring) and is reflected in the consolidated statement of
operations as restructuring charges.
In 1996, MRC's board of directors approved a separate management plan to close
and or merge several redundant CSC's as well as certain corporate offices in
order to reduce costs and improve operating efficiencies. The plan was
essentially completed during 1997 and included the cost of exiting certain
facilities, primarily related to non-cancelable leases, and employee severance
costs. Costs associated with the plan of approximately $644 have been recognized
in 1996 in accordance with EITF 94-3 and are reflected in the supplemental
consolidated statement of operations as restructuring charges.
In 1997, MRC's board of directors approved a separate management plan to close
and/or merge several redundant CSC's in order to further reduce costs and
improve operating efficiencies. The plan anticipated completion during 1998 and
included the cost of exiting certain facilities, primarily related to
non-cancelable leases and the disposition of fixed assets, and employee
severance costs. Costs associated with the plan of approximately $2,075 have
been recognized in 1997 in accordance with EITF 94-3 and are reflected in the
supplemental consolidated statement of operations as restructuring charges.
Included in this amount is approximately $705 for the disposal of assets and
approximately $800 in severance and employee contract buy outs. The balance is
primarily related to non-cancelable lease costs. The severance costs are
attributable to eight individuals from various levels of operational and senior
management.
As of December 31, 1996 and 1997, approximately $870 and $1,733 of these
activities had not been completed and are included in accrued expenses in the
supplemental consolidated balance sheets. All other costs have been paid or
charged to the accrual.
Advertising Costs
The Company charges advertising costs to expense as incurred. Advertising
expense was $191, $329 and $678 for the years ended December 31, 1995, 1996 and
1997, respectively.
Research and Development Costs
Research and development costs are expenses as incurred. There were no research
and development costs in 1995. Total research and development costs were
approximately $450 and $550 for the years ended December 31, 1996 and 1997,
respectively.
F-10
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Statements of Cash Flow Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid interest
of $3,841, $1,404 and $1,027, respectively, and income taxes of $521, $1,700 and
$3,162, respectively. Capital lease obligations of $612, $191 and $174 were
incurred on equipment leases entered into in 1995, 1996 and 1997, respectively.
In 1996, $500 of debt was exchanged for shares of capital stock.
The following table displays the net noncash financing activities resulting from
the Company's business acquisitions accounted for under the purchase method (see
Note 2):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Noncash net assets acquired ............... $ 24,724 $ 35,724 $ 8,965
Less- Seller notes and payables ........... (22,714) (3,318) (3,337)
Common stock issued ....................... (185) (6,201) --
-------- -------- --------
Net cash paid for business acquisitions $ 1,825 $ 26,205 $ 5,628
======== ======== ========
</TABLE>
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Income Per Common Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This statement establishes new standards for computing and presenting
earnings per share and requires the restatement of prior year amounts. The
Company adopted SFAS No. 128 effective December 31, 1997.
Basic income per share is calculated by dividing net income by the weighted
average number of shares of Common stock outstanding for the period. Diluted
income per share is calculated by dividing net income by the weighted average
number of shares of Common stock outstanding for the period, adjusted for the
dilutive effect of Common stock equivalents, which consist of stock options,
using the treasury stock method.
F-11
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The table below sets forth the reconciliation of the numerators and denominators
of the basic and diluted income per share computations for income from
continuing operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------------------------
1995 1996 1997
--------------------------------- -------------------------------- ---------------------------------
PER PER PER
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic income from
continuing
operations ...... $2,361 10,289 $ 0.23 $5,288 24,138 $ 0.22 $8,733 31,726 $ 0.28
Effect of
dilutive
securities ...... -- 552 (0.01) -- 1,906 (0.02) -- 1,632 (0.02)
------ ------ ----- ------ ------ ------ ------ ------ ------
Diluted income
from continuing
operations ...... $2,361 10,841 $ 0.22 $5,288 26,044 $ 0.20 $8,733 33,358 $ 0.26
====== ====== ===== ====== ====== ======= ====== ====== ======
</TABLE>
For the years ended December 31, 1995, 1996 and 1997, 645, 1,288 and 1,961
Common stock options and warrants were excluded from the diluted computation
because their effect would be anti-dilutive.
New Accounting Pronouncement
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. Management believes that SFAS
No. 131 will have no effect on the Company's financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. ACQUISITIONS
Effective May 1, 1994, the Company purchased substantially all of the assets of
Transcriptions, Ltd. and affiliates ("Transcriptions"), as well as assumed
certain liabilities, as defined, for $16,930 in cash, including acquisition
costs of $322, plus the payment of Transcriptions' interest bearing debt of
$5,816, plus a deferred purchase price based on future operating results.
Effective December 29, 1995, and in connection with the sale of the receivables
management division (see Note 3), the Company fixed the deferred purchase price
by agreeing to pay the former owners of Transcriptions $18,375 in cash and issue
2,584 shares of Common stock (valued at $4,550 for financial reporting purposes)
on August 31, 1996.
F-12
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
2. ACQUISITIONS -- (CONTINUED)
The total purchase price for the Transcriptions acquisition was $44,797. The
acquisition has been accounted for using the purchase method with the purchase
price allocated to the fair value of the acquired assets and liabilities.
In July 1996, MRC acquired all of the outstanding capital stock of Medical
Records Corp. The former shareholders of Medical Records Corp. received total
consideration of approximately $27,000, consisting of cash, notes and shares of
Common stock. The acquisition was accounted for as a purchase, and the results
of Medical Records Corp. are included in the accompanying supplemental
consolidated financial statements from the date of the acquisition. In
connection with the acquisition, MRC assumed certain acquisition-related
liabilities from Medical Records Corp. The cost of the acquisition has been
allocated on the basis of the estimated fair market value of the assets acquired
and liabilities assumed. The allocation resulted in goodwill and other
intangible assets of approximately $33,015, which are being amortized over lives
of 1.5 to 30 years.
The following unaudited pro forma summary presents the results of operations of
the Company as if the payment of the Transcriptions deferred purchase price,
which causes additional amortization and interest expense, and the Medical
Records Corp. acquisition had occurred on January 1, 1995.
YEAR ENDED DECEMBER 31
------------------------
1995 1996
---- ----
Revenues ..................................... $ 152,259 $ 179,683
Income (loss) from continuing operations ..... (4,053) 726
Basic and diluted income (loss) per share from
continuing operations ................... (.39) .03
From 1995 through 1997, the Company completed several smaller acquisitions
accounted for using the purchase method. Pro forma information is not presented
as these acquisitions are not material to the Company.
Certain of the acquisitions provide for additional consideration to be paid if
net future billings to defined customers exceed specified contractual levels.
These provisions expire in 2000 and 2001, and are generally payable on a
quarterly basis. When the contingency is resolved and additional consideration
is due, the Company accounts for the payment as additional purchase price and
amortizes the additional amount paid over the remaining life of the asset.
In 1998, the Company completed certain acquisitions accounted for under the
pooling-of-interests method (see Note 11).
3. DISCONTINUED OPERATIONS
In December 1995, the Company sold its receivables management business for total
consideration of $17,330. The accompanying financial statements reflect the
receivables management business as discontinued operations. For the year ended
December 31, 1995, the discontinued operation generated revenue of $18,767 and
net income of $1,451. The 1995 divestiture generated an after-tax loss of
$3,180, which includes net income of $113 related to operations from the
November 14, 1995 measurement date through the December 29, 1995 disposal date.
F-13
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
4. PROPERTY AND EQUIPMENT
DECEMBER 31
-----------------------
1996 1997
---- ----
Furniture, equipment and software ............. $ 37,098 $ 46,608
Leasehold improvements ........................ 911 1,341
-------- --------
38,009 47,949
Less- Accumulated depreciation and amortization (16,711) (22,507)
-------- --------
$ 21,298 $ 25,442
======== ========
In 1995, MRC evaluated the remaining estimated useful lives of certain
equipment, including dictation equipment and related software. As a result, the
remaining lives of these assets were shortened, which resulted in an increase in
depreciation expense of $741 in 1995.
5. INTANGIBLE ASSETS
DECEMBER 31
----------------------
1996 1997
-------- --------
Excess of cost over net asset value of
acquired businesses ................ $ 62,940 $ 64,600
Customer lists ....................... 14,880 21,552
Non-compete agreements ............... 3,305 3,405
Employee base ........................ 2,439 2,514
Other ................................ 122 137
-------- --------
83,686 92,208
Less- Accumulated amortization ....... (4,155) (9,826)
-------- --------
$ 79,531 $ 82,382
======== ========
F-14
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1997
-------- --------
<S> <C> <C>
Line of credit ................................................. $ 329 $ 132
Note payable to bank ........................................... 6,650 5,250
Note payable to former shareholders' of
Medical Records Corp. ...................................... 2,000 2,000
Subordinated convertible 6% promissory note, due September 2003,
converted in January 1998 .................................. 1,288 1,288
Promissory notes, repaid in January 1998 ....................... 979 3,797
Capital lease obligations ...................................... 2,910 1,786
Other .......................................................... 199 128
-------- --------
14,355 14,381
Less- current portion .......................................... (4,391) (6,792)
-------- --------
$ 9,964 $ 7,589
======== ========
</TABLE>
On April 23, 1997, the Company amended its credit facility to provide for a $10
million unsecured senior revolving line of credit through April 23, 2000. The
revolver bears interest at resetting rates selected by the Company from various
alternatives. The interest rate alternatives are either (i) the greater of (x)
prime rate, (y) the federal funds rate plus 0.5% (z) the bank's certificate of
deposit rate plus 1%, or (ii) LIBOR plus 0.75%. The credit facility also allows
for the Company to finance up to 100% of any acquisitions of companies that are
in the business of providing transcriptions-related services. The financing of
these acquisitions may be carved out of the revolver and amortized over 20
consecutive quarters. Each acquisition term loan that is created would
permanently reduce the remaining borrowings under the revolver.
In addition to acquisitions, the revolver can be used for working capital and
general corporate purposes. To the extent any amounts under the revolver are
repaid, other than acquisition term loans, the Company may reborrow such
amounts. The credit facility requires the Company to maintain certain financial
and non-financial covenants, including limitations on capital expenditures and
dividends.
For the year ended December 31, 1997, the Company did not incur any interest
expense on the revolving credit facility as there were no borrowings on this
credit facility during the year. For the years ended December 31, 1995 and 1996,
the Company incurred interest expense of $498 and $49 on the revolving credit
facility, at a weighted average interest rate of 8.96% and 9.78%. The highest
outstanding borrowings under the revolver during 1995 and 1996 were $7,332 and
$2,534, respectively.
In connection with the acquisition of Medical Records Corp., MRC entered into a
note agreement with a bank. The note was for $7,000 with an interest rate of
LIBOR plus 1.65%, which totals approximately 7.3% at December 31, 1997. The note
is secured by substantially all of MRC's assets. The agreement requires the
payment of interest quarterly along with equal monthly principal payments of
$117 through September 2001. The note requires the maintenance of certain
financial covenants, including a minimum net income covenant.
F-15
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
6. LONG-TERM DEBT -- (CONTINUED)
In connection with the acquisition of Medical Records Corp., MRC issued seven
year, 8% unsecured notes to former shareholders of Medical Records Corp. for
$2,000. The notes require the payment of interest quarterly, with annual
principal payments of $500 beginning in July 2000.
In December 1995, MedQuist restructured its prior credit facility. In connection
with the restructuring, the Company charged to expense, as an extraordinary
item, the related deferred financing costs of $826, increasing the 1995 net loss
by $545.
In January 1998, the subordinated convertible 6% promissory note was converted
into 172 shares of Common stock at a conversion price of $7.48 per share.
Long-term debt maturities as of December 31, 1997, are as follows:
1998 ................................. $ 6,792
1999 ................................. 1,736
2000 ................................. 1,972
2001 ................................. 1,585
2002 ................................. 508
2003 and thereafter .................. 1,788
----------
$ 14,381
==========
7. SHAREHOLDERS' EQUITY
On September 9, 1997, the Company effected a three-for-two stock split for all
shares of Common stock. Further, on June 15, 1998, the Company effected a
two-for-one stock split for all shares of Common stock.
In May 1996, MedQuist consummated a secondary public offering of its Common
stock, selling 6,600 shares at a price of $5.67 per share. In June 1996, the
underwriters exercised their overallotment option for an additional 922 shares.
After deducting the underwriters' discount and offering expenses, the net
proceeds to the Company were $39,442.
In connection with the 1992 issuance of a senior subordinated note, the Company
sold to the holder for $1,100 warrants to purchase 1,732 shares of Class A and
1,068 shares of Class B Preferred Stock at an exercise price of $2.50 per share.
Each share of Class A and Class B Preferred Stock was convertible into one share
of Common stock. During 1994, the holder was issued additional warrants and all
warrant exercise prices were reset at $2.43, in accordance with the antidilution
provisions of the original warrant agreement. Simultaneous with the closing of
the secondary stock offering, the Company and the holder agreed that the holder
would exercise the warrants by tendering the $7,000 principal amount of the
senior subordinated notes and simultaneously converting the shares of Preferred
stock received upon such exercise into 2,888 shares of Common stock. As an
inducement for the holder to exercise the warrants and convert the Preferred
stock, the Company issued the holder 128 additional shares of Common stock. This
inducement, valued at $707 or $0.04 per diluted share, has been recorded as a
deduction from the net income available to common shareholders in 1996.
F-16
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
7. SHAREHOLDERS' EQUITY
In connection with the Company's May 1994 credit agreement, the Company issued
the agent bank warrants to purchase 226 shares of Common stock at an exercise
price of $2.25 per share. These warrants were exercised on June 12, 1997 by the
agent bank for proceeds to the Company of $508.
In connection with the sale of equity securities to certain investors in 1992
and 1993, warrants to purchase Common stock were issued by MRC to these
investors. The warrants were fully vested and exercisable at the date of
issuance and have terms which permit conversion into Common stock at specified
prices during periods ranging from four to five years. The fair value of the
warrants at the date of grant was de minimis and therefore no compensation
expense has been recorded in the accompanying financial statements. At December
31, 1996 and 1997, warrants to purchase 194 shares at a weighted average
exercise price of $12.69 were outstanding. All of the warrants outstanding at
December 31, 1997 are exercisable. The warrants were exercised in 1998.
8. STOCK OPTION PLANS
MedQuist has three stock option plans that provide for the granting of options
to purchase an aggregate of 5,860 shares of Common stock to eligible employees
(including officers) and nonemployee directors of the Company. Options granted
may be at fair market value of the Common stock or at a price determined by a
committee of the Company's board of directors. The stock options vest and are
exercisable over periods determined by the committee.
Information with respect to MedQuist's options is as follows:
OPTION PRICE AGGREGATE
SHARES PER SHARE PROCEEDS
------ ------------- --------
Outstanding, December 31, 1994 1,500 $0.67 -$ 2.25 $ 2,510
Granted ................... 918 2.42 - 3.17 2,594
Exercised ................. (520) 0.67 - 2.42 (796)
Canceled .................. (136) 0.67 - 2.25 (259)
------ ------------- --------
Outstanding, December 31, 1995 1,762 0.67 - 3.17 4,049
Granted ................... 961 2.80 - 6.94 4,509
Exercised ................. (98) 1.14 - 5.13 (226)
Canceled .................. (90) 3.17 (285)
------ ------------- --------
Outstanding, December 31, 1996 2,535 1.14 - 6.94 8,047
Granted ................... 918 5.21 - 16.52 10,988
Exercised ................. (533) 1.14 - 10.41 (1,277)
Canceled .................. (94) 4.37 - 16.52 (481)
------ ------------- --------
Outstanding, December 31, 1997 2,826 $1.14 -$16.52 $ 17,277
===== ========
At December 31, 1997, there were 1,255 exercisable options at an aggregate
exercise price of $3,664 and 624 additional options available for grant under
the plans.
F-17
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
8. STOCK OPTION PLANS -- (CONTINUED)
The options outstanding and exercisable by exercise price at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUSTANDING LIFE PRICE EXERCISABLE PRICE
---------------- ---------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.14 - $ 3.83 1,365 6.15 $ 2.40 1,135 $ 2.33
5.13 - 11.31 894 8.72 6.54 90 6.68
13.82 - 16.52 567 9.96 14.41 30 13.81
------ ----- ------- ----- ------
2,826 7.73 $ 6.11 1,255 $ 2.92
====== ===== ======= ===== ======
</TABLE>
MRC has reserved 1,291 shares of Common stock for issuance under its Amended and
Restated 1992 Employee Stock Option Plan (the "Plan"). The options have been
granted at amounts equal to or in excess of the fair market value of MRC's
Common stock as determined by the board of directors. The options vest over
periods ranging from the date of grant to five years as determined by the board
of directors at the date of grant. As of December 31, 1997, the Company had 774
shares outstanding under the Plan and 480 shares available for grant.
The board of directors also has issued options in addition to those issued under
the Plan. The number of shares that may be granted under this arrangement has
not been limited. These options have been granted at amounts equal to or in
excess of fair market value of MRC's Common stock as determined by the board of
directors. The options vest over periods ranging from the date of grant to ten
years as determined by the board of directors at the date of grant. As of
December 31, 1997, the board of directors had granted 647 shares under this
arrangement.
F-18
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
8. STOCK OPTION PLANS -- (CONTINUED)
Information with respect to MRC's options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
------ ------------ --------
<S> <C> <C> <C>
Outstanding, December 31, 1994 653 $ 8.19 - $13.56 $ 12.76
Granted ................................ 659 8.19 - 12.45 8.70
Forfeited/canceled ..................... (631) 12.45 - 13.56 12.47
Exercised ............................. (36) 8.19 8.19
------- ---------------- ----------
Outstanding, December 31, 1995 ............ 645 8.19 - 12.45 8.64
Granted ................................ 709 8.31 - 10.48 10.09
Forfeited/canceled ..................... (66) 8.31 - 12.45 8.44
------- ---------------- ----------
Outstanding, December 31, 1996 ............ 1,288 8.19 - 12.45 9.45
Granted ................................ 232 10.48 10.48
Forfeited/canceled ..................... (99) 8.31 - 12.45 9.59
------- ---------------- -----------
Outstanding, December 31, 1997 ............ 1,421 $ 8.19 - $12.45 $ 9.37
====== ================= ==========
Options exercisable at December 31, 1997 .. 741 $ 8.19 - $12.45 $ 9.10
====== ================ ==========
</TABLE>
The weighted average grant date fair value of MRC options granted during 1995,
1996 and 1997 was $8.70, $10.09 and $10.48, respectively. The weighted average
remaining contractual life of the MRC stock options outstanding at December 31,
1997 was 8.05 years.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and the related interpretations in accounting for
its stock option plans. Had compensation cost for the Company's Common stock
options been determined based upon the fair value of the options at the date of
grant, as prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income (loss) available to common shareholders
would have been the following pro forma amounts:
YEAR ENDED DECEMBER 31
-----------------------------------
1995 1996 1997
------ -------- --------
Net income (loss):
As reported ..................... $ 87 $ 4,581 $ 8,733
Pro Forma ....................... (758) (1,893) (6,656)
Basic net income (loss) per share:
As reported ..................... .01 .19 .28
Pro forma ....................... (.07) (.08) (.21)
Diluted net income (loss) per share:
As reported ..................... .01 .17 .26
Pro forma ....................... (.07) (.08) (.21)
F-19
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
8. STOCK OPTION PLANS -- (CONTINUED)
The fair value of the options granted is estimated using the Black-Scholes
option pricing model with the following assumptions: dividend yield of 0.0%,
volatility of 50.0%-55.0%, risk-free interest rates of 5.3% to 8.0%, and
expected lives of five to ten years. The above pro forma amounts may not be
indicative of future amounts because option grants prior to January 1, 1995 have
not been included and because future option grants are expected.
9. INCOME TAXES
The income tax provision consists of the following:
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1996 1997
------- ------- -------
Current:
State and local....... $ 181 $ 79 $ 1,176
Federal .............. 161 1,536 4,317
------- ------- -------
342 1,615 5,493
Deferred ................. (146) 1,105 (200)
------- ------- -------
$ 196 $ 2,720 $ 5,293
======= ======= =======
YEAR ENDED DECEMBER 31
--------------------------------------
1995 1996 1997
------- ------- -------
Continuing operations .... $ 640 $ 2,720 $ 5,293
Discontinued operations:
Income from operations 796 -- --
Loss on disposal ..... (959) -- --
Extraordinary item ....... (281) -- --
------- ------- -------
$ 196 $ 2,720 $ 5,293
======= ======= =======
F-20
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
9. INCOME TAXES -- (CONTINUED)
A reconciliation of the statutory federal income tax rate to the effective
continuing operations income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate .................. 34.0 % 34.0 % 35.0 %
State income taxes, net of federal benefit ......... 6.5 % 3.0 % 3.0 %
Impact of Signal and TLF "S" Corporation status .... (22.2)% (8.0)% (4.9)%
Other .............................................. 3.0 % 5.0 % 4.6 %
---- ---- ----
21.3 % 34.0 % 37.7 %
==== ==== ====
</TABLE>
Signal and TLF were taxed as an "S" Corporation prior to their mergers with
MedQuist. Accordingly, the former Signal and TLF shareholders were taxed
individually on their companies' taxable income. Therefore, no tax provision is
included in the accompanying supplemental financial statements related to Signal
and TLF's net income (see Note 1).
The tax effected temporary differences that give rise to deferred income taxes
are as follows:
DECEMBER 31
--------------------
1996 1997
------- -------
Deferred tax asset:
Restructuring accruals .... $ 119 $ 602
Carryforwards ............. 2,005 338
Accruals and reserves ..... 1,570 2,237
------- -------
$ 3,694 $ 3,177
======= =======
Deferred tax liability:
Accumulated depreciation ... $(1,522) $(1,475)
Accumulated amortization ... (3,970) (3,518)
Deferred compensation ...... 224 210
Other ...................... (1,601) (1,711)
------- -------
$(6,869) $(6,494)
======== =======
MRC has a net operating loss carryforward of approximately $441 at December 31,
1997 that expires through 2011. MRC also has alternative minimum tax credit
carryforwards of $162 at December 31, 1997. It is expected that these
carryforwards will be utilized in 1998 prior to MRC's merger with MedQuist.
At December 31, 1997, the tax bases of Signal's net assets approximated their
reported amount for financial statement purposes. However, Signal and the
Company have elected to treat their merger as an asset purchase for income tax
purposes. Accordingly, the Company recorded a deferred tax asset and an increase
in additional paid-in capital of approximately $4,600 in the quarter ended
September 30, 1998, which represents the tax effect of goodwill that will be
recorded for income tax purposes.
F-21
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
10. COMMITMENTS AND CONTINGENCIES
Rent expense for operating leases was $2,433, $5,053 and $4,599 for the years
ended December 31, 1995, 1996 and 1997, respectively. Minimum annual rental
commitments for noncancelable operating leases having terms in excess of one
year as of December 31, 1997, are as follows:
1998 .......................... $ 4,921
1999 .......................... 3,899
2000 .......................... 2,733
2001 .......................... 1,588
2002 .......................... 682
2003 and thereafter ........... 230
--------
$ 14,053
The Company has an employment agreement, as amended, with a former Chief
Executive Officer who is currently a director of the Company. The agreement
entitles this individual to receive retirement benefits of $75 per year for life
plus certain other benefits, as defined. Included in other long-term liabilities
is $631 and $544 at December 31, 1996 and 1997, respectively, related to these
retirement benefits. The employment agreement also requires the Company to loan
the former Chief Executive Officer's estate the necessary funds to exercise any
options owned by the individual at the time of his death.
The Company has a severance plan for certain executive officers that provides
for one-time payments in the event of a change in control, as defined. No
liabilities are currently required to be recorded with respect to this plan.
In the normal course of business, the Company is a party to various claims and
legal proceedings. Although the ultimate outcome of these matters is presently
not determinable, management of the Company, after consultation with legal
counsel, does not believe that the resolution of these matters will have a
material effect upon the Company's financial position or results of operations.
11. ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1997
On May 28, 1998, the Company completed the acquisition of approximately 94% of
the outstanding capital stock of DDI and on July 31, 1998 acquired the remaining
shares. The Company issued 912 shares in exchange for all DDI shares. The
acquisition was accounted for using the pooling-of-interests method of
accounting. Accordingly, the Company's historical financial statements were
retroactively restated to reflect the combination with DDI.
On August 18, 1998, the Company completed the acquisition of Signal, which was
accounted for using the pooling-of-interests method. The Company issued 619
shares of its Common stock and approximately $1,500 in cash in exchange for all
Signal capital stock. The Company's historical financial statements have been
restated to reflect the combination with Signal. Signal and the Company have
elected to treat their merger as an asset purchase for income tax purposes. The
Company recorded a deferred tax asset of approximately $4,600 that was credited
directly to shareholders' equity in the quarter ended September 30, 1998 to
reflect the tax effect of goodwill that will be recorded for tax purposes (see
Note 9).
On November 30, 1998, the Company completed the acquisition of TLF, which will
be accounted for using the pooling-of-interests method. The Company issued 800
shares of its Common stock for all TLF capital stock.
F-22
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
11. ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1997 -- (CONTINUED)
Accordingly, the Company's supplemental consolidated financial statements have
been restated to reflect the combination with TLF.
On September 18, 1998 the Company signed a definitive merger agreement with MRC
and on December 10, 1998, the merger was consummated. Pursuant to the agreement,
the Company exchanged each share of MRC Common stock and each share of MRC
Preferred stock on an as-converted basis for 0.5163 shares of its Common stock.
In total, the Company issued 8,662 shares of its Common stock to the former MRC
shareholders and options to purchase an aggregate of 1,543 shares to the former
MRC option holders. The MRC merger will be accounted for as a
poling-of-interests. Accordingly, the Company's supplemental consolidated
financial statements have been restated to reflect the merger with MRC.
Revenue and net income as previously reported for the years ended December 31,
1995, 1996 and 1997, and as restated for the pooling of interests transactions
is as follows:
YEAR ENDED
DECEMBER 31, 1997
-------------------------
REVENUES NET INCOME
-------- ----------
MedQuist, as previously reported ..... $ 84,590 $ 7,631
DDI .................................. 10,026 616
Signal ............................... 9,294 1,100
TLF .................................. 4,131 712
MRC .................................. 108,117 (1,326)
-------- --------
Restated ............................. $216,158 $ 8,733
======== ========
YEAR ENDED
DECEMBER 31, 1996
-------------------------
REVENUES NET INCOME
-------- ----------
MedQuist, as previously reported ..... $ 61,480 $ 3,477
DDI .................................. 6,937 440
Signal ............................... 8,058 842
TLF .................................. 3,934 882
MRC .................................. 71,700 (1,060)
-------- --------
Restated ............................. $152,109 $ 4,581
======== ========
YEAR ENDED
DECEMBER 31, 1995
-------------------------
REVENUES NET INCOME
-------- ----------
MedQuist, as previously reported ..... $ 45,127 $ (1,667)
DDI .................................. 5,058 104
Signal ............................... 7,120 1,135
TLF .................................. 3,172 642
MRC .................................. 49,180 (127)
-------- --------
Restated ............................. $109,657 $ 87
======== ========
F-23
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
11. ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1997 -- (CONTINUED)
Prior to their mergers with the Company, Signal and TLF were taxed as "S"
Corporations. The above net income (loss) amounts do not include a "C"
Corporation income tax provision for Signal and TLF of approximately $672, $637
and $682 for the years ended December 31, 1995, 1996 and 1997, respectively.
12. QUARTERLY SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)
Year Ended December 31, 1997:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues ......................... $49,914 $52,999 $55,269 $57,976
Income before income taxes ....... 3,283 4,557 4,632 1,554
Net income ....................... 2,058 2,931 2,910 834
Basic net income per share ....... 0.07 0.10 0.10 0.02
Diluted net income per share ..... 0.06 0.09 0.09 0.02
</TABLE>
F-24
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 14,489 $ 25,207
Accounts receivable, net of allowance of $1,298 and $1,821 ............ 41,819 47,494
Prepaid expenses and other current assets ............................. 7,181 3,666
-------- --------
Total current assets ................................... 63,489 76,367
Property and equipment, net .............................................. 25,442 27,184
Other assets ............................................................. 2,154 4,132
Intangible assets, net ................................................... 82,382 83,116
-------- --------
$173,467 $190,799
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ..................................... $ 6,792 $ 2,038
Accounts payable ...................................................... 5,777 4,879
Accrued expenses ...................................................... 14,618 23,736
-------- --------
Total current liabilities .............................. 27,187 30,653
Long-term debt ........................................................... 7,589 4,982
Other liabilities ........................................................ 1,130 751
Deferred income taxes .................................................... 6,188 3,131
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock, no par value, 60,000 shares authorized, 32,138 and 33,123
shares issued and outstanding ....................................... -- --
Additional paid-in capital ............................................ 119,008 127,930
Retained earnings ..................................................... 12,365 22,767
Unrealized gain on marketable securities .............................. -- 585
-------- --------
Total shareholders' equity ............................. 131,373 151,282
-------- --------
$173,467 $190,799
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL (UNAUDITED) CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
Nine Months Ended September 30,
-------------------------------
1997 1998
---- ----
Revenues ................................. $ 158,182 $ 199,790
Costs and expenses:
Cost of revenues ...................... 123,112 154,041
Selling, general and administrative ... 10,692 12,831
Depreciation .......................... 7,454 9,470
Amortization .......................... 4,090 2,794
Transaction costs ..................... -- 2,182
--------- ---------
Total operating expenses 145,348 181,318
Operating income ......................... 12,834 18,472
Interest income (expense), net ........... (362) 211
--------- ---------
Income before income taxes ............... 12,472 18,683
Income tax provision ..................... 4,573 6,935
--------- ---------
Net income ............................... $ 7,899 $ 11,748
========= =========
Basic net income per share ............... $ 0.25 $ 0.36
========= =========
Diluted net income per share ............. $ 0.24 $ 0.34
========= =========
Pro forma amounts (Note 3):
Income before income taxes, as reported $ 12,472 $ 18,683
Income tax provision .................. 5,132 7,405
--------- ---------
Net income ............................ $ 7,340 $ 11,278
========= =========
Basic net income per share ............ $ 0.23 $ 0.34
========= =========
Diluted income per share .............. $ 0.23 $ 0.33
========= =========
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL (UNAUDITED) CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ......................................................... $ 7,899 $ 11,748
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Compensation expense for stock options ................................ -- 404
Deferred tax provision ................................................ 388 (270)
Loss on disposal of property .......................................... 90 1
Depreciation and amortization ......................................... 11,544 12,264
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures--
Accounts receivable, net .......................................... (4,873) (5,362)
Prepaid expenses and other current assets ......................... 78 (824)
Other assets ...................................................... 8 (110)
Accounts payable .................................................. 435 (898)
Accrued payroll ................................................... 1,807 2,533
Accrued expenses .................................................. 1,121 6,689
Other long-term liabilities ....................................... (69) (68)
-------- --------
Net cash provided by operating activities .................. 18,428 26,107
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment ....................................... (10,397) (11,203)
Acquisitions, net of cash acquired ........................................ (5,153) (5,804)
Purchases of investments .................................................. 1,202 4,610
-------- --------
Net cash used in investing activities ........................... (14,348) (12,397)
-------- --------
FINANCING ACTIVITIES:
Net borrowings on revolving line of credit ................................ (329) 60
Repayments of long-term debt .............................................. (2,114) (5,287)
Repayments of obligations under capital leases ............................ (229) (380)
Net proceeds from issuance of Common stock ................................ 1,485 --
Proceeds from exercise of Common stock options ............................ -- 1,668
Distributions ............................................................. (860) (1,014)
Repurchase and retirement of Common stock ................................. (467) --
Proceeds from the exercise of warrants .................................... -- 1,961
-------- --------
Net cash used in financing activities ............................. (2,514) (2,992)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................................... 1,566 10,718
CASH AND CASH EQUIVALENTS, BEGINNINGOF PERIOD ................................ 14,940 14,489
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................... $ 16,506 $ 25,207
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest .................................................................. $ 792 $ 467
======== ========
Income taxes .............................................................. $ 2,059 $ 5,006
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
F-27
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(IN THOUSANDS)
NOTE 1. BASIS OF PRESENTATION
The information set forth in these statements is unaudited. The information
reflects all adjustments, consisting of normal recurring adjustments that, in
the opinion of management, are necessary for a fair presentation. Results of
operations for the period ended September 30, 1998 are not necessarily
indicative of the results of operations for the full year. Certain information
in footnote disclosures normally included in financial statements have been
condensed or omitted in accordance with the rules and regulations of the
Securities and Exchange Commission.
On November 30, 1998 and December 10, 1998, the Company consummated the
acquisitions of Transcriptions Ltd. of Florida, Inc. ("TLF") and The MRC Group,
Inc. ("MRC"), respectively, which will be accounted for using the
pooling-of-interests method. Accounting Principles Board Opinion No. 16
precludes the restatement of financial statements for a pooling-of-interests
transaction prior to the issuance of financial statements covering a period
encompassed by the transaction. Accordingly, the accompanying consolidated
financial statements set forth a supplemental presentation of the Company's
financial statements retroactively restated to reflect the combinations with TLF
and MRC (see Note 3). The accompanying supplemental consolidated financial
statements do not include the estimated transaction costs related to the TLF and
MRC acquisitions of $9,500, and costs associated with known bonus and severance
arrangements with former MRC employees of approximately $1,600, which will be
charged to expense in the quarter ended December 31, 1998. In addition, the
Company expects to record a restructuring charge in the quarter ended December
31, 1998 for certain costs associated with combining the companies, primarily
severance and duplicate faculty leases.
NOTE 2. MRC RESTRUCTURING CHARGES
In 1995, 1996 and 1997, MRC's board of directors approved various management
plans which resulted in restructuring charges in the amounts of $347, $644 and
$2,075, respectively. The charges were recorded in accordance with the criteria
set forth in EITF 94-3; Liability Recognition For Costs To Exit An Activity
(Including Certain Costs Incurred In A Restructuring). During the first nine
months of 1998, non-cancelable lease costs of $196, asset disposal costs of $291
and severance costs of $110 were paid and charged against the restructuring
accrual. At September 30, 1998, the remaining accrued restructuring costs
balance in accrued liabilities is $1,136. The components of this balance include
$556 for non-cancelable lease costs, $414 for asset disposal costs and $166 for
severance and employee contract buy-outs. The Company anticipates that the
restructuring will be completed during 1998, however, certain accrued
restructuring costs will remain outstanding until all obligations are paid.
NOTE 3. ACQUISITIONS
During 1998, the Company completed three acquisitions accounted for using the
purchase method and one immaterial acquisition accounted for using the
pooling-of-interest method. Pro forma information is not presented as the
acquisitions are not material to the Company.
On May 28, 1998, the Company completed the acquisition of approximately 94% of
the outstanding capital stock of Digital Dictation, Inc. ("DDI" and on July 31,
1998 acquired the remaining shares. The Company issued 912 shares in exchange
for all DDI shares. The acquisition was accounted for using the
pooling-of-interests method of accounting. Accordingly, the Company's historical
financial statements were retroactively restated to reflect the combination with
DDI.
F-28
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED -- IN THOUSANDS)
NOTE 3. ACQUISITIONS -- (CONTINUED)
On August 18, 1998, the Company completed the acquisition of Signal
Transcriptions Network, Inc. ("Signal"), which was accounted for using the
pooling-of-interests method. The Company issued 619 shares of its Common stock
and $l.5 million in cash in exchange for all Signal capital stock. The Company's
historical financial statements have been restated to reflect the combination
with Signal. Signal and the Company have elected to treat their merger as an
asset purchase for income tax purposes. The accompanying consolidated balance
sheets include a deferred tax asset of approximately $4,600 that was credited
directly to shareholders' equity in the quarter ended September 30, 1998 to
reflect the tax effect of goodwill recorded for tax purposes in the Merger.
On November 30, 1998, the Company completed the acquisition of TLF, which will
be accounted for using the pooling-of-interests method. The Company issued 800
shares of its Common stock for all TLF capital stock. Accordingly, the Company's
supplemental consolidated financial statements have been restated to reflect the
combination with TLF.
On September 18, 1998 the Company signed a definitive merger agreement with MRC
and on December 10, 1998, the merger was consummated. Pursuant to the agreement,
the Company exchanged each share of MRC Common stock and each share of MRC
Preferred stock on an as-converted basis for 0.5163 shares of its Common stock.
In total, the Company issued 8,662 shares of its Common stock to the former MRC
shareholders and options to purchase an aggregate of 1,543 shares to the former
MRC option holders. The MRC merger will be accounted for as a
poling-of-interests. Accordingly, the Company's supplemental consolidated
financial statements have been restated to reflect the merger with MRC.
Revenues and net income as previously reported for the nine months ended
September 30, 1997 and 1998 and as restated for the pooling of interests
transactions is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
-------------------------- ----------------------------
REVENUES NET INCOME REVENUES NET INCOME
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
MedQuist, as previously reported $ 60,707 $ 5,422 $ 92,914(a) $ 8,258(a)
DDI ............................ 7,039 425 6,165(b) 253(b)
Signal ......................... 6,834 979 5,281(b) 543(b)
TLF ............................ 3,075 490 3,688 522
MRC ............................ 80,527 583 91,742 2,172
-------- -------- -------- --------
Restated ....................... $158,182 $ 7,899 $199,790 $ 11,748
======== ======== ======== ========
</TABLE>
(a) Includes DDI and Signal amounts from July 1, 1998.
(b) Reflects amounts from January 1, 1998 to June 30, 1998.
Prior to their mergers with the Company, Signal and TLF were taxed as "S"
Corporations. The above net income amounts do not include a "C" Corporation
income tax provision for Signal and TLF of approximately $559 and $470 for the
nine months ended September 30, 1997 and 1998, respectively.
F-29
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED -- IN THOUSANDS)
NOTE 4. NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." This statement established new standards for computing and presenting
earnings per share and requires the restatement of prior year amounts. The
Company adopted SFAS No. 128 effective December 31, 1997.
Basic net income per share is calculated by dividing net income by the weighted
average number of shares of Common stock outstanding for the period. Diluted net
income per share is calculated by dividing net income by the weighted average
number of shares of Common stock outstanding for the period, adjusted for the
dilutive effective of Common stock equivalents, which consist of stock options,
using the treasury stock method.
The table below sets forth the reconciliation of the numerators and denominators
of the basic and diluted net income per share computations:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
1997 1998
--------------------------------------- ---------------------------------------
NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic ............ $ 7,899 31,600 $ 0.25 $11,748 32,322 $ 0.36
Effect of dilutive
securities .... -- 1,531 (0.01) -- 2,308 (0.02)
------- ------- -------- ------- ------- --------
Diluted .......... $ 7,899 33,131 $ 0.24 $11,748 34,630 $ 0.34
======= ======= ======== ======= ======= ========
</TABLE>
NOTE 5. NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of and
Enterprise and Related Information." This statement establishes new standards
for segment reporting in the financial statements and is effective for fiscal
years beginning after December 15, 1997. Management believes that SFAS No. 131
will have no effect on the Company's financial statements
NOTE 6. SHAREHOLDERS' EQUITY
On September 9, 1997, the Company effected a three-for-two stock split for all
shares of Common stock. On June 15, 1998, the Company effected a two-for-one
stock split for all shares of Common stock. All shares and per share amounts
have been restated for the stock splits.
F-30
EXHIBIT 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
of our report on MedQuist Inc.'s supplemental consolidated financial statements,
filed as part of this Form 8-K, into the Company's previously filed Form S-3
Registration Statements, file nos. 333-58113, 333-69687, Form S-8 Registration
Statements, file nos. 333-09541, 333-09543, 33-51508 and 333-66447 and Form S-4
Registration Statement file no. 333-57265.
/s/ Arthur Andersen LLP
Philadelphia, PA
February 26, 1999
