As filed with the Securities and Exchange Commission on February 16, 1999
Registration No. 333-69687
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MEDQUIST INC.
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2531298
----------------------- -----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Five Greentree Centre
Suite 311
Marlton, New Jersey 08053
(609) 596-8877
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
John M. Suender
Senior Vice President, General Counsel and Secretary
MedQuist Inc.
Five Greentree Centre
Suite 311
Marlton, New Jersey 08503
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Approximate date of commencement of proposed
sale of the securities to the public:
As soon as practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |_|
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box, and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(A) of the
Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(A), may
determine.
<PAGE>
- --------------------------------------------------------------------------------
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
- --------------------------------------------------------------------------------
Subject to Completion, Dated February 16, 1999
PROSPECTUS
[MEDQUIST LOGO]
800,000 Shares
Common Stock
Mr. Jeffrey Krieger, a shareholder of MedQuist Inc., is offering and
selling 800,000 shares of MedQuist common stock pursuant to this prospectus.
MedQuist will not receive any proceeds from the sale of common stock by Mr.
Krieger.
Prospective purchasers should consider the "Risk Factors" beginning on
page 2.
Mr. Krieger may sell his MedQuist common stock in one or more
transactions on the Nasdaq National Market at market prices prevailing at the
time of sale or in private transactions at negotiated prices.
MedQuist common stock trades on the Nasdaq National Market under the
symbol "MEDQ."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is February ___, 1999.
<PAGE>
Table of Contents
Page
----
Forward-Looking Statements.................................................1
The Company ...............................................................1
Risk Factors...............................................................2
Where You Can Find More Information........................................9
Selected Supplemental Financial Data .....................................11
Use of Proceeds...........................................................14
Selling Shareholder.......................................................14
Plan of Distribution......................................................14
Legal Matters.............................................................16
Experts...................................................................16
Index to Financial Statements............................................F-1
You should rely only on the information incorporated by reference or
rprovided in this prospectus. MedQuist has not authorized anyone else to provide
you with different information. Mr. Krieger will not make an offer of these
shares in any state where the offer is not permitted. You should not assume that
the information in this prospectus is accurate as of any date other than the
date on the front page of this prospectus.
<PAGE>
Forward-Looking Statements
Some of the information in this prospectus may contain forward-looking
statements. Forward-looking statements can be identified by the use of
forward-looking language such as "will likely result," "may," "are expected to,"
"is anticipated," "estimate," "projected," "intends to" or other similar words.
MedQuist's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements.
Forward-looking statements are subject to certain risks and uncertainties,
including but not limited to the risks described below. See "Risk Factors" on
page 2. When considering these forward-looking statements, you should keep in
mind these risk factors and other cautionary statements in this prospectus. You
should not place undue reliance on any forward-looking statement which speaks
only as of the date made.
The Company
Background
MedQuist is a leading national provider of transcription services to
the healthcare industry. MedQuist employs more than 6,000 trained
transcriptionists who utilize MedQuist's proprietary software to convert medical
dictation into electronically formatted patient records which health care
providers use in connection with patient care and for other administrative
purposes. MedQuist's customized services enable clients to improve the accuracy
of transcribed medical reports, reduce report turnaround times, shorten billing
cycles and reduce overhead and other administrative costs.
MedQuist was incorporated in New Jersey in 1984 and reorganized in 1987
as a group of out-patient healthcare businesses affiliated with a non-profit
health care provider. By the end of 1995, MedQuist had divested all of its
non-medical transcription businesses. Since May 1994, MedQuist has acquired 18
medical transcription companies.
Address and Telephone Number of MedQuist
MedQuist's executive offices are located at Five Greentree Centre,
Suite 311, Marlton, New Jersey, 08053 and the telephone number for MedQuist is
(609) 596-8877.
<PAGE>
Risk Factors
In considering whether to acquire MedQuist common stock, you should
consider carefully the risks associated with the ownership of MedQuist common
stock. These risks are described in detail below.
Our growth strategy includes acquisitions and if we are unable to make
acquisitions, or if those acquisitions are not successful, it could have a
material adverse effect on our business, financial condition and results of
operations
As part of our growth strategy, we have made, and plan to continue to
make acquisitions of other companies. We may not be able to make acquisitions in
the future. In addition, any acquisition that we make could have a material
adverse effect on our business, financial condition and results of operations.
Future acquisitions are subject to many risks, including the risks that
o we may not be able to identify suitable companies to buy;
o we may not be able to purchase companies at favorable prices, or at
all;
o we may not be able to obtain financing on favorable terms, or at all,
to pay for future acquisitions and;
o we may not be able to effectively integrate the acquired businesses or
technologies into our operations.
In addition, in order to consummate future acquisitions, we may be required to
borrow money or incur other liabilities, which could have a material adverse
effect on our liquidity and capital resources. We may also be required to issue
additional shares of stock, which could result in dilution to our shareholders.
Our success depends on our key personnel and, if we are not able to
retain them, it could have a material adverse effect upon our business,
financial condition or results of operations
We believe that our success is dependent upon the continued employment
of our senior management team. The loss of services of David A. Cohen, our chief
executive officer, or John A. Donohue, our chief operating officer, for any
reason could have a material adverse effect upon our business, financial
condition or results of operations.
2
<PAGE>
New services or products using new technologies, such as voice
recognition, could render our services obsolete
The introduction of competing services or products incorporating new
technologies, such as voice recognition capabilities or other alternative means
of data entry, could render some or all of our services obsolete. If we are not
successful in improving our current services and developing new services that
keep pace with technological developments on a timely basis, our business,
financial condition and results of operations will be materially and adversely
affected. In addition, we cannot assure you that any improvements or new
services will achieve market acceptance.
Our success depends upon qualified transcriptionists and if we are not
able to hire and retain qualified transcriptionists, it could have a materially
adverse effect on our business
Our success also depends, in part, upon our ability to attract and
retain qualified transcriptionists who can provide the accuracy and turnaround
time required by our customers. Competition for transcriptionists is intense. If
we are not able to attract and retain qualified transcriptionists, it could have
a materially adverse effect on our business, financial condition and results of
operations.
If federal or state officials successfully challenge our treatment of
our at-home transcriptionists as independent contractors, we may have to pay or
incur additional employment costs, taxes and penalties which could have a
material adverse effect on our business, financial condition and results of
operations
We treat most of our at-home transcriptionists as independent
contractors for state tax, benefits and unemployment purposes and as statutory
employees for federal income tax and social security tax purposes. However, we
treat at-home transcriptionists who came to work for us as a result of our
acquisition of MRC as employees for state tax, benefits, unemployment, federal
income tax and social security tax purposes. If federal or state officials
successfully challenge our position regarding treatment of at-home
transcriptionists as independent contractors, we may have to pay or incur
additional employment costs, taxes and penalties which could have a material
adverse effect on our business, financial condition and results of operations.
3
<PAGE>
We may experience significant quarterly fluctuations in our operating
results which could adversely affect the market price of our common stock.
Our operating results have fluctuated from quarter to quarter in the
past and may continue to do so in the future. These fluctuations adversely
affect the market price of our common stock. Quarterly operating results may
fluctuate as a result of a variety of factors, including:
o changes in demand for our services;
o the size and timing of individual customer contracts;
o changes in customer budgets;
o the size and timing of acquisitions;
o the integration of acquired businesses into our operations;
o the number and timing of new hires;
o long lead-times required to generate revenues from new clients;
o competitive conditions in the industry; and
o general economic conditions.
Because of the foregoing factors, it is possible that in future quarters our
operating results may be below the expectations of stock market analysts and
investors which could have a material adverse effect on the price of our common
stock.
If we are not able to maintain our current rate of growth in
revenues and profits, it could adversely affect the market price of our common
stock.
Our revenue and profits have grown in recent periods as a result of
both internal growth and acquisitions. If we are not able to maintain our
current rate of growth in revenues and profits, it could adversely affect the
market price of our common stock.
The market price of our common stock may be volatile
The market price of our common stock has been, and in the future may
be, volatile. Our common stock price may be affected by many factors, including
the following:
o fluctuations in our operating results
o acquisitions;
o technological innovations or new products or services by us or our
competitors;
o government regulation;
o health care legislation and reforms; and
o general market and economic conditions.
4
<PAGE>
In addition, the stock market in recent years has experienced extreme
price and volume fluctuations. This has resulted in substantial volatility of
health care service companies that has often been unrelated to the operating
performance of these companies. These or other factors may adversely affect the
market price of our common stock.
We depend on a single line of business and any reduction in demand or
increase in competition for our services could have a material adverse effect on
our business, financial condition and results of operations
We anticipate that we will continue to derive our future revenues
solely from providing transcription services to hospitals and other health care
organizations. A reduction in demand or an increase in competition in the market
for our transcription services could have a material adverse effect on our
business, financial condition and results of operations.
Changes in the health care industry could adversely affect the demand
for our services or the amounts we are paid for our services
The health care industry is subject to changing political, economic and
regulatory influences that could adversely affect the demand for our services or
the amounts we are paid for our services. Many federal and state legislators
from time to time propose programs to reform the United States health care
system at both the federal and state level. These programs may contain proposals
to increase governmental involvement in health care, lower reimbursement rates
and otherwise change the environment in which providers operate. Health care
providers may react to these proposals and the uncertainty surrounding these
proposals by curtailing outsourcing arrangements or deferring decisions
regarding the use of outsourced services.
In addition, in response to the changes in the health care industry,
many health care providers are consolidating to create larger health care
delivery organizations. This consolidation reduces the number of potential
customers for our services and increases the bargaining power of these
organizations. This increased bargaining power could reduce the amounts we are
paid for our services. The impact of these developments in the health care
industry is difficult to predict and could have a material adverse effect on our
business, operating results and financial condition.
Our plans to expand into new markets, such as outpatient clinics and
physician practice groups and direct patient care departments within hospitals,
may not be successful
We plan to expand into new markets such as outpatient clinics and
physician practice groups and direct patient care departments within hospitals.
Our business, operating results and financial condition may be materially and
adversely affected if our efforts to expand into new
5
<PAGE>
markets are not successful. To date, our services have been purchased primarily
by the medical records departments of hospitals. However, health care services
are increasingly being provided at sites other than hospitals, such as
outpatient clinics and physician practice groups. We intend to attempt to
increase our limited presence in these non-hospital markets. In addition, we
intend to market our services to direct patient care departments within
hospitals. Our plans to expand into these new markets may not be successful for
many reasons, including the following:
o we have limited experience in these new markets;
o we may find that significant modifications to our services are
necessary in order for our services to be useful to customers in these
new markets;
o we may have to reduce our prices; and
o we will have to establish new contacts.
We compete with many suppliers in the transcription services industry
We compete with over an estimated 1,500 medical transcription service
companies in the United States. These companies offer services that are similar
to ours and compete with us for the same customers and qualified
transcriptionists. We also compete with the in-house transcription staffs of
potential customers. Increased competition may result in lower prices for our
services, higher payroll costs, reduced operating margins and the inability to
increase our market share, any of which would have a material adverse effect on
our business, financial condition and results of operations.
Although many of our competitors are small local or regional companies,
several of our competitors are large national companies including Transcend
Services, Inc., Rodeer Systems, Inc., and a subsidiary of Harris Corp. In
addition, we anticipate increasing competition from other large companies that
were not traditionally in the medical transcription business, such as IDX
Systems Corporation. These current and potential competitors may have
substantially greater financial, technical and marketing resources than us. As a
result, these competitors may be able to respond more quickly to evolving
technological developments or changing customer needs or to devote greater
resources to the development, promotion or sale of their services.
In addition, competition may increase due to consolidation of
transcription companies. Current and potential competitors may establish
cooperative relationships with third parties to increase the ability of their
services to address the needs of our current and prospective customers.
We may not be able to protect our proprietary rights
Our success depends on the software underlying our services. We
consider this software to be proprietary. If our competitors copy our software
or independently develop software
6
<PAGE>
similar to ours, it could materially adversely affect our business, financial
condition and results of operations. Although we seek to protect this software
by a combination of copyright and trademark law, trade secrets, confidentiality
agreements and contractual provisions, unauthorized parties may attempt to copy
some or all of our software or to obtain and use information that we regard as
proprietary. We have no patents or patent applications pending, and existing
trade secrets and copyright laws afford only limited protection. Policing
unauthorized use of our software is difficult. We may have to resort to
litigation to enforce our proprietary rights. This litigation could be very
expensive and divert our management and key personnel from their normal
responsibilities. We cannot assure you that we would prevail in any litigation.
We may infringe the proprietary rights of others
Other persons or companies may claim that we are violating their
proprietary rights. Any claims, with or without merit, can be time-consuming and
expensive to defend. In addition, we may be required to enter into royalty or
licensing agreements or cease the infringing activities. If we fail to obtain
those agreements or become involved in claims or litigation, it could have a
material adverse effect on our business, results of operations and financial
condition.
We may be subject to material liability if we fail to comply with
confidentiality requirements
We are subject to various laws, regulations and contractual provisions
regarding the confidentiality of medical information. We may be subject to
material liability if we fail to comply with confidentiality requirements.
Our systems may not be Year 2000 compliant which could result in an
inability to transcribe medical records, send invoices or engage in similar
normal business activities for a period of time after January 1, 2000 which
could materially and adversely affect our business, operating results and
financial position
We may experience system failures and disruptions of operations if the
systems on which we depend to conduct our operations are not Year 2000
compliant. This could result in an inability to transcribe medical records, send
invoices or engage in similar normal business activities for a period of time
after January 1, 2000. We rely on our computer, digital dictation, software,
telephone and other systems in operating and monitoring all aspects of our
business. We also rely heavily on the systems of our customers, suppliers and
other organizations with which we do business. If these systems are not Year
2000 complaint, our business, operating results and financial position could be
materially and adversely affected.
7
<PAGE>
Anti-takeover provisions may make it more difficult for a third party
to acquire control of us, could adversely affect the market price of our common
stock and could reduce the amount that shareholders might receive if we are sold
Anti-takeover provisions contained in New Jersey law and in our
charter, bylaws and contracts could make it more difficult for a third party to
acquire control of us, even if that change in control would be beneficial to
shareholders. These provisions could adversely affect the market price of our
common stock and could reduce the amount that shareholders might receive if we
are sold. These anti-takeover provisions include the following:
o New Jersey law prohibits us from entering into certain business
combination transactions with any shareholder which owns 10% or more
of our outstanding voting securities, except under limited
circumstances.
o Our charter gives our board of directors the authority to issue shares
of preferred stock without shareholder approval. Any preferred stock
could have rights, preferences and privileges that could adversely
affect the voting power and the other rights of the holders of our
common stock.
o Our charter provides for staggered terms for the members of the board
of directors, with each board member serving a staggered three year
term.
o We have entered into severance arrangements with most of our senior
management which provide for payments upon a change in control.
o Options to purchase our stock will immediately become exercisable upon
a change in control.
8
<PAGE>
Where You Can Find More Information
MedQuist Inc. files annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements and other information MedQuist files with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. MedQuist's SEC filings are also available on
the SEC's Internet site (http://www.sec.gov).
MedQuist has filed a registration statement on Form S-3 to register the
shares of MedQuist common stock offered under this prospectus. This prospectus
is a part of the registration statement on Form S-3 and constitutes a prospectus
of MedQuist. As allowed by SEC rules, this prospectus does not contain all the
information you can find in the registration statement on Form S-3 or the
exhibits to the registration statement on Form S-3.
The SEC also allows MedQuist to "incorporate by reference" the
information it files with the SEC, which means MedQuist can disclose information
to you by referring you to another document filed separately with the SEC.
Information incorporated by reference is deemed to be part of this prospectus.
Later information filed by MedQuist with the SEC updates and supersedes this
prospectus.
This prospectus incorporates important business and financial information about
MedQuist that is not included in or delivered with this prospectus. Copies of
any of that information are available without charge to any person to whom this
prospectus is delivered, upon written or oral request. Written requests for
those documents should be directed to the Corporate Secretary, MedQuist Inc.,
Five Greentree Centre, Suite 311, Marlton, New Jersey, 08053, and telephone
requests may be directed to the Corporate Secretary at (609) 596-8877.
The following documents previously filed by MedQuist with the SEC
pursuant to the Exchange Act are incorporated herein by this reference:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
SEC Filings Period
----------------------------------------------------------------------------------------------------------------
<S> <C>
Annual Report on Form 10-K (including those portions of Year ended December 31, 1997
MedQuist's proxy statement for its 1998 annual
meeting of shareholders incorporated by reference
to the Annual Report on Form 10-K)
----------------------------------------------------------------------------------------------------------------
Quarterly Reports on Form 10-Q (as amended) Quarters ended March 31, 1998,
June 30, 1998 and September 30, 1998
----------------------------------------------------------------------------------------------------------------
9
<PAGE>
<CAPTION>
Current Reports on Form 8-K Filed on May 13, 1998, June 12, 1998,
June 29, 1998, September 29, 1998 and
December 15, 1998
----------------------------------------------------------------------------------------------------------------
Registration Statement on Form 8-A filed pursuant to Section Filed on March 11, 1992
12(g) of the Exchange Act
----------------------------------------------------------------------------------------------------------------
</TABLE>
All documents filed by MedQuist pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this prospectus and prior
to the termination of the offering will be deemed to be incorporated by
reference in this prospectus and to be a part of this prospectus from the date
that document is filed.
10
<PAGE>
Selected Supplemental Financial Data
(In thousands, except per share data)
The following data is supplemental to reflect the retroactive
restatement of MedQuist's financial statements for its November 30, 1998
acquisition of TL of Florida and its December 10, 1998 acquisition of MRC, both
of which were accounted for as pooling of interests and does not include (i) the
transaction costs of approximately $9,500 related to the TLF and MRC
acquisitions or (ii) the restructuring costs associated with severance for
former MRC employees and the closing of duplicate facilities of approximately
$6,500, which was charged to expense in the quarter ended December 31, 1998.
Signal and TL of Florida were "S" corporations prior to their mergers with
MedQuist, and accordingly, the supplemental statements of operations data does
not include a provision for income taxes on their income. See Note 1 to the
Supplemental Consolidated Financial Statements.
MedQuist derived the following financial information from the audited
supplemental financial statements for the years ended December 31, 1995, 1996
and 1997 and from the unaudited supplemental financial statements for the years
ended December 31, 1993 and 1994 and for the nine months ended September 30,
1997 and 1998. Operating results for the nine months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1998. This information is only a summary and you
should read it in conjunction with MedQuist's supplemental financial statements
and related notes included elsewhere in this Prospectus and other information
MedQuist has filed with the SEC. See "Where You Can Find More Information."
11
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
----------------------- -------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operation Data:
Revenues.............................. $29,738 $59,228 $109,657 $152,109 $216,158 $158,182 $199,790
------- ------- -------- -------- -------- -------- --------
Costs and expenses:
Costs of revenues..................... 24,404 46,873 86,265 118,359 168,596 123,112 154,041
Selling, general and administrative... 5,635 6,184 9,144 12,527 15,001 10,692 12,831
Depreciation.......................... 3,205 2,581 5,752 7,372 10,339 7,454 9,470
Amortization.......................... 12 264 896 3,150 5,652 4,090 2,794
Nonrecurring merger costs............. -- -- 347 644 2,075 -- 2,182
------- ------- -------- -------- -------- -------- --------
Total operating expenses... 33,256 55,902 102,404 142,052 201,663 145,348 181,318
------- ------- -------- -------- -------- -------- --------
Operating income (loss)............... (3,518) 3,326 7,253 10,057 14,495 12,834 18,472
Interest expense (income), net........ 1,689 2,648 4,252 2,049 469 362 (211)
------- ------- -------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes................. (5,207) 678 3,001 8,008 14,026 12,472 18,683
Income tax provision (benefit)........ (1,290) (529) 640 2,720 5,293 4,573 6,935
------- ------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations.......................... (3,917) 1,207 2,361 5,288 8,733 7,899 11,748
Discontinued operations............... 3,746 1,612 (1,729) -- -- -- --
Extraordinary item.................... -- -- (545) -- -- -- --
------- ------- -------- -------- -------- -------- --------
Net income(loss)...................... (171) 2,819 87 5,288 8,733 7,899 11,748
Inducement deduction.................. -- -- -- (707) -- -- --
------- ------- -------- -------- -------- -------- --------
Net income (loss) available to common
shareholders........................ $ (171) $2,819 $ 87 $4,581 $8,733 $7,899 $11,748
======= ======= ======== ======== ======== ======== ========
Basic income (loss) per commons share:
Continuing operations............... $(0.33) $.12 $0.23 $0.22 $0.28 $0.25 $0.36
Discontinued operations............. .32 0.17 (0.17) -- -- -- --
Extraordinary item.................. -- -- (0.05) -- -- -- --
Inducement deduction................ -- -- -- (0.03) -- -- --
------- ------- -------- -------- -------- -------- --------
$(0.01) $(0.29) $0.01 $(0.19) $0.28 $0.25 $0.36
======= ======= ======== ======== ======== ======== ========
Diluted income (loss) per common share:
Continuing operations............... $(0.33) $0.12 $0.22 $0.20 $0.26 $0.24 $0.34
Discontinued operations............. 0.32 0.17 (0.16) -- -- -- --
Extraordinary item.................. -- -- (0.05) -- -- -- --
Inducement deduction................ -- -- -- (0.03) -- -- --
------- ------- -------- -------- -------- -------- --------
$(0.01) $(0.29) $0.01 $(0.17) $0.26 $0.24 $0.34
======= ======= ======== ======== ======== ======== ========
Balance Sheet Data:
Working capital..................... $10,499 $6,453 $13,142 $33,483 $36,302 $31,157 $45,714
Total assets........................ 49,742 85,811 91,191 158,551 173,467 163,987 190,799
Long-term debt, net of current
portion........................... 13,480 39,577 23,342 9,964 7,589 8,515 4,982
Shareholders' equity................ 8,884 12,096 13,065 120,710 131,373 77,061 151,282
12
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<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
---------------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Pro Forma Data:
Income (loss) reported from continuing
operations before income taxes, as
presented............................. $(5,207) $678 $3,001 $8,008 $14,026 $12,47 $18,683
Income tax provision (benefit)........... (1,045) (40) 1,312 3,357 5,975 5,132 7,405
------- ------- -------- -------- -------- -------- --------
Income (loss) from continuing operations .. $(4,162) $718 $1,689 $4,651 $8,051 $7,340 $11,278
======= ======= ======== ======== ======== ======== ========
Income (loss) from continuing operations per share:
Basic................................ (0.36) 0.07 0.16 0.19 0.25 0.23 0.34
Diluted.............................. (0.36) 0.07 0.16 0.18 0.24 0.23 0.33
</TABLE>
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Use of Proceeds
All net proceeds from the sale of MedQuist common stock will go to Mr.
Jeffrey Krieger. Accordingly, MedQuist will not receive any proceeds from the
sale of the shares by Mr. Krieger.
Selling Shareholder
The following table provides certain information as of the date of this
prospectus regarding Mr. Jeffrey Krieger's beneficial ownership of MedQuist
common stock prior to and after the sale of the shares offered under this
prospectus. Beneficial ownership is determined under the rules of the SEC, and
generally includes voting or investment power with respect to securities. All of
the shares being offered by Mr. Krieger were acquired by him as a result of
MedQuist's acquisition of Transcriptions Limited of Florida, Inc. Mr. Krieger is
the former president and former sole shareholder of Transcriptions Limited of
Florida, Inc. 80,000 of the 809,000 shares beneficially owned by Mr. Krieger
prior to the offering are owned of record by MD Oppenheim, as escrow agent.
After the offering, Mr. Krieger will own less than one percent of the
outstanding MedQuist common stock.
<TABLE>
<CAPTION>
# of Shares Owned # of Shares Being # of Shares Owned After
Prior to the Offering Offered for Sale the Offering
--------------------- ----------------- ------------------------
<S> <C> <C> <C>
Jeffrey Krieger 809,000 800,000 9,000
</TABLE>
Plan of Distribution
Mr. Krieger may offer his shares of MedQuist common stock at various
times in one or more of the following transactions:
o on the Nasdaq National Market;
o in the over-the-counter market;
o in negotiated transactions;
o in connection with short sales of the MedQuist common stock;
o by engaging in transactions using options to buy or sell shares of
MedQuist common stock;
o in a combination of any of the above transactions.
14
<PAGE>
Mr. Krieger may sell his shares at market prices prevailing at the time
of sale, at prices related to those prevailing market prices or at negotiated
prices.
Mr. Krieger may use broker-dealers to sell his shares. If this happens,
broker-dealers will either receive discounts or commissions from Mr. Krieger, or
they will receive commissions from purchasers of shares for whom they acted as
agents.
Because Mr. Krieger may be deemed to be an "underwriter" within the
meaning of Section 2(11) of the Securities Act, Mr. Krieger will be subject to
the prospectus delivery requirements of the Securities Act. MedQuist has
informed Mr. Krieger that the anti-manipulative provisions of Regulation M
promulgated under the Exchange Act may apply to his sales in the market.
Upon MedQuist being notified by Mr. Krieger that any material
arrangement has been entered into with a broker-dealer for the sale of shares of
MedQuist common stock through a block trade, special offering, exchange
distribution or secondary distribution or a purchase by a broker-dealer, a
supplement to this prospectus will be filed, if required, pursuant to Rule
424(b) under the Securities Act disclosing:
o the name of each selling shareholder and of the participating
broker-dealer(s);
o the number of shares involved;
o the price at which those shares were sold;
o the commissions paid or discounts or concessions allowed to those
broker-dealer(s), where applicable;
o that those broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in this
prospectus; and
o other facts material to the transaction.
In addition, upon MedQuist being notified by Mr. Krieger that a donee
or pledgee intends to sell more than 500 shares, a supplement to this prospectus
will be filed.
15
<PAGE>
Legal Matters
John M. Suender, MedQuist's Senior Vice President and General Counsel
has given his opinion that the shares offered by Mr. Jeffrey Krieger are legally
issued, fully paid and non-assessable. As of the date of this prospectus, Mr.
Suender beneficially owns 47,320 shares of MedQuist's common stock.
Experts
The audited supplemental consolidated financial statements of MedQuist
Inc. and Subsidiaries included in this prospectus and the audited consolidated
financial statements of MedQuist Inc. and Subsidiaries incorporated by reference
in this prospectus and elsewhere in this registration statement of which this
prospectus is a part, have been audited by Arthur Andersen LLP, independent
public accounts, as indicated in their reports with respect thereto, and are
included herein and incorporated by reference, respectively, in this prospectus
in reliance upon the authority of said firm as experts in giving said reports.
The audited financial statements of The MRC Group, Inc. and Subsidiary
and Medical Records Corp. incorporated by reference in this prospectus and
elsewhere in this registration statement of which this prospectus is a part,
have been audited by Arthur Andersen LLP, independent public accounts, as
indicated in their reports with respect thereto, and are incorporated by
reference in this prospectus in reliance upon the authority of said firm as
experts in giving said reports.
The combined restated financial statements of Medical Records Corp. and
Affiliate, incorporated by reference in this prospectus and elsewhere in the
Registration Statement of which this prospectus is a part, have been audited by
Skoda, Minotti, Reeves & Co., independent public accounts, as indicated in their
report with respect thereto, and are incorporated by reference in this
prospectus in reliance upon the authority of said firm as experts in giving said
reports.
16
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
MEDQUIST INC. AND SUBSIDIARIES
Report of Independent Public Accountants ............................................. F-2
Supplemental Consolidated Balance Sheets, December 31, 1996 and 1997 ................. F-3
Supplemental Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997 ............................................................. F-4
Supplemental Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1996 and 1997 ................................................ F-5
Supplemental Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 ............................................................. F-6
Notes to Supplemental Consolidated Financial Statements .............................. F-7
Supplemental Consolidated Balance Sheets, December 31, 1997 and June 30, 1998
(unaudited) ..................................................................... F-25
Supplemental Unaudited Consolidated Statements of Operations for the nine months ended
September 30, 1997 and 1998 ..................................................... F-26
Supplemental Unaudited Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1998 ..................................................... F-27
Notes to Supplemental Unaudited Consolidated Financial Statements .................... F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MedQuist Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
MedQuist Inc. (a New Jersey corporation) and Subsidiaries as of December 31,
1996 and 1997, and the related supplemental consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. The supplemental consolidated statements
give retroactive effect to the Company's mergers with The MRC Group, Inc. on
December 10, 1998 and Transcriptions Ltd. of Florida, Inc. on November 30, 1998,
which have been accounted for as pooling-of-interests, as described in Note 1.
These supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
MedQuist Inc. and its subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, after giving retroactive effect to the
mergers with The MRC Group, Inc. on December 10, 1998 and Transcriptions Ltd. of
Florida, Inc. on November 30, 1998 as described in Note 1, all in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
December 22, 1998
F-2
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31
---------------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 14,940 $ 14,489
Short-term investments ................................................ 3,002 4,003
Accounts receivable, net of allowance of $1,032 and $1,298 ............ 32,315 41,819
Deferred income taxes ................................................. 3,022 2,871
Prepaid expenses and other ............................................ 665 307
-------- --------
Total current assets ................................... 53,944 63,489
Property and equipment, net .............................................. 21,298 25,442
Intangible assets, net ................................................... 79,531 82,382
Other .................................................................... 3,778 2,154
-------- --------
$158,551 $173,467
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ..................................... $ 4,391 $ 6,792
Accounts payable ...................................................... 4,976 5,777
Accrued payroll ....................................................... 5,663 7,175
Accrued expenses ...................................................... 5,431 7,443
-------- --------
Total current liabilities .............................. 20,461 27,187
-------- --------
Long-term debt ........................................................... 9,964 7,589
Other long-term liabilities .............................................. 1,219 1,130
Deferred income taxes .................................................... 6,197 6,188
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock, no par value, 60,000 shares authorized, 31,428 and 32,138
shares issued and outstanding ....................................... -- --
Additional paid-in capital ............................................ 115,978 119,008
Retained earnings ..................................................... 4,732 12,365
-------- --------
Total shareholders' equity ............................. 120,710 131,373
-------- --------
$158,551 $173,467
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1995 1996 1997
--------- ---------- ---------
<S> <C> <C> <C>
Revenues ............................................ $ 109,657 $ 152,109 $ 216,158
Costs and expenses:
Cost of revenues ................................. 86,265 118,359 168,596
Selling, general and administrative .............. 9,144 12,527 15,001
Depreciation ..................................... 5,752 7,372 10,339
Amortization ..................................... 896 3,150 5,652
Restructuring charges ............................ 347 644 2,075
--------- --------- ---------
Total operating expenses .......... 102,404 142,052 201,663
Operating income .................................... 7,253 10,057 14,495
Interest expense, net ............................... 4,252 2,049 469
--------- --------- ---------
Income from continuing operations before income taxes 3,001 8,008 14,026
Income tax provision ................................ 640 2,720 5,293
--------- --------- ---------
Income from continuing operations ................... 2,361 5,288 8,733
Discontinued operations, net of income taxes:
Income from operations ......................... 1,451 -- --
Loss on disposal ............................... (3,180) -- --
--------- --------- ---------
Income before extraordinary item .................... 632 5,288 8,733
Loss on early extinguishment of debt, net of
income tax benefit ............................... (545) -- --
--------- --------- ---------
Net income .......................................... 87 5,288 8,733
Inducement of warrant exercise ...................... -- (707) --
--------- --------- ---------
Net income available to common shareholders ......... $ 87 $ 4,581 $ 8,733
========= ========= =========
Basic income per common share (Note 1):
Income from continuing operations ................ $ 0.23 $ 0.22 $ 0.28
Discontinued operations .......................... (0.17) -- --
Extraordinary item ............................... (0.05) -- --
Inducement of warrant exercise ................... -- (0.03) --
--------- --------- ---------
$ 0.01 $ 0.19 $ 0.28
========= ========= =========
Diluted income per common share (Note 1):
Income from continuing operations ................ $ 0.22 $ 0.20 $ 0.26
Discontinued operations .......................... (0.16) -- --
Extraordinary item ............................... (0.05) -- --
Inducement of warrant exercise ................... -- (0.03) --
--------- --------- ---------
$ 0.01 $ 0.17 $ 0.26
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 ........................ 10,419 $ -- $ 9,860 $ 2,490 $ 12,350
Net income ..................................... -- -- -- 87 87
Exercise of Common stock options,
including tax benefit ........................ 556 -- 1,506 -- 1,506
Merger costs ................................... -- -- (51) -- (51)
Distributions .................................. -- -- -- (1,498) (1,498)
Issuance of Common stock in connection with
business acquisition ......................... 70 -- 185 -- 185
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 ........................ 11,045 -- 11,500 1,079 12,579
Net income ..................................... -- -- -- 5,288 5,288
Exercise of Common stock options,
including tax benefit ........................ 98 -- 336 -- 336
Issuance of Common stock in connection with
business acquisitions ........................ 4,773 -- 10,751 -- 10,751
Sale of Common stock, net of expenses .......... 12,532 -- 86,707 -- 86,707
Distributions .................................. -- -- -- (928) (928)
Exercise of warrants, including
inducement charge ............................ 3,016 -- 6,980 (707) 6,273
Purchase and retirement of Common stock, at cost
(36) -- (296) -- (296)
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 ........................ 31,428 -- 115,978 4,732 120,710
Net income ..................................... -- -- -- 8,733 8,733
Exercise of Common stock options,
including tax benefit ........................ 533 -- 2,377 -- 2,377
Sale of Common stock, net of expenses .......... 33 -- 251 -- 251
Distributions .................................. -- -- -- (1,100) (1,100)
Purchase and retirement of Common stock, at cost
(82) -- (676) -- (676)
Exercise of warrant, including
tax benefit .................................. 226 -- 1,078 -- 1,078
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ........................ 32,138 $ -- $ 119,008 $ 12,365 $ 131,373
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................. $ 87 $ 4,581 $ 8,733
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization .......................... 8,295 10,522 15,991
Amortization of debt discounts ......................... 131 704 --
Loss on disposal of discontinued operations ............ 4,286 -- --
Loss on early extinguishment of debt ................... 545 -- --
Deferred income tax provision (benefit) ................ (146) 1,813 (200)
Loss (gain) on disposal of property .................... (1) -- 223
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures--
Accounts receivable, net ........................... (908) (5,571) (7,230)
Prepaid expenses and other ......................... 452 1,403 631
Other assets ....................................... (26) 182 (362)
Accounts payable ................................... 303 (1,983) 543
Accrued payroll .................................... (244) 773 817
Accrued expenses ................................... (123) (1,605) 2,358
Other long-term liabilities ........................ (91) (79) (87)
-------- -------- --------
Net cash provided by operating activities .......... 12,560 10,740 21,417
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment ........................ (7,065) (6,509) (13,716)
Acquisitions, net of cash acquired ......................... (1,825) (26,205) (5,628)
Proceeds from divestiture .................................. 16,723 -- --
Sale (purchase) of investments ............................. 2,400 (5,893) 973
-------- -------- --------
Net cash provided by (used in)investing activities.. 10,233 (38,607) (18,371)
-------- -------- --------
FINANCING ACTIVITIES:
Repayments of long-term debt and subordinated payable ...... (24,485) (38,728) (3,757)
Proceeds from issuance of long-term debt ................... 5,000 7,057 --
Borrowing under line of credit ............................. 265 64 --
Merger costs ............................................... (51) -- --
Distributions .............................................. (1,506) (973) (1,100)
Proceeds from exercise of Common stock options ............. 296 226 1,277
Net proceeds from issuance of Common stock ................. 796 68,714 251
Purchase and retirement of Common stock, at cost ........... -- (296) (676)
Deferred financing costs ................................... (178) -- --
Proceeds from exercise of warrants ......................... -- -- 508
-------- -------- --------
Net cash provided by (used in) financing activities (19,863) 36,064 (3,497)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... 2,930 8,197 (451)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR .................................................... 3,813 6,743 14,940
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR ........................ $ 6,743 $ 14,940 $ 14,489
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background
MedQuist Inc. (the "Company" or "MedQuist") is a leading national provider of
electronic transcription and document management services to the health care
industry in the United States. MedQuist was incorporated in New Jersey in 1987
as a group of outpatient health care businesses affiliated with a nonprofit
health care provider. In May 1994, Transcriptions, Ltd. was acquired (see Note
2). In November 1995, the Company discontinued its receivables management
business. The operations and net assets of the receivables management business
and the outpatient businesses, which together formed one business segment, have
been accounted for as discontinued operations (see Note 3).
Basis of Presentation
On May 28, 1998, the Company consummated the acquisition of Digital Dictation,
Inc. ("DDI"). The acquisition was accounted for using the pooling-of-interests
method of accounting and the Company's historical financial statements were
retroactively restated to reflect the combination with DDI. The restated
financial statements were issued in Item 5 of the Company's June 30, 1998
quarterly report on Form 10-Q.
On August 18, 1998, the Company consummated the acquisition of Signal
Transcription Network, Inc. ("Signal"). The acquisition was accounted for using
the pooling-of-interests method of accounting and the Company's historical
financial statements were retroactively restated to reflect the Combination with
Signal. The restated financial statements were issued in Item 5 of the Company's
September 30, 1998 quarterly report on Form 10-Q.
On November 30, 1998 and December 10, 1998, the Company consummated the
acquisitions of Transcriptions Ltd. of Florida, Inc. ("TLF") and The MRC Group,
Inc. ("MRC"), respectively, which will be accounted for using the
pooling-of-interests method. Accounting Principles Board Opinion No. 16
precludes the restatement of financial statements for a pooling-of-interests
transaction prior to the issuance of financial statements covering a period
encompassed by the transaction. Accordingly, the accompanying consolidated
financial statements set forth a supplemental presentation of the Company's
financial statements, retroactively restated to reflect the combinations with
TLF and MRC (see Note 11). The accompanying supplemental consolidated financial
statements do not include the estimated transaction costs related to the TLF and
MRC acquisitions of $9,500, and costs associated with known bonus and severance
arrangements with former MRC employees of approximately $1,600, which will be
charged to expense in the quarter ended December 31, 1998. In addition, the
Company expects to record a restructuring charge in the quarter ended December
31, 1998 for certain costs associated with combining the companies, primarily
severance and duplicate facility leases.
F-7
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Pro Forma Presentation for Signal and TLF Income Taxes
Prior to their mergers with the Company, Signal and TLF were taxed as "S"
Corporations. Accordingly, no tax provision is included in the accompanying
supplemental financial statements related to Signal and TLF's income. The
following pro forma presentation sets forth the Company's supplemental income
tax provision, income from continuing operations and income from continuing
operations per share as if Signal and TLF had been taxed as "C" Corporations for
all periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Income from continuing operations before income
taxes, as reported ................................. $ 3,001 $ 8,008 $14,026
Pro forma income tax provision ....................... 1,312 3,357 5,975
------- ------- -------
Pro forma income from continuing operations .......... $ 1,689 $ 4,651 $ 8,051
======= ======= =======
Pro forma income per share from continuing operations:
Basic ........................................... $ 0.16 $ 0.19 $ 0.25
Diluted ......................................... $ 0.16 $ 0.18 $ 0.24
</TABLE>
Common Stock Splits
On September 9, 1997, the Company effected a three-for-two stock split for all
shares of Common stock. Further, on June 15, 1998, the Company effected a
two-for-one stock split for all shares of Common stock. All share data in the
accompanying financial statements has been retroactively adjusted to reflect
both stock splits.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported assets and liabilities and contingency disclosures at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Fees for transcription-related services are based primarily on contracted rates,
and revenue is recognized upon the rendering of services and delivery of
records.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments purchased
with an original maturity of three months or less, consisting primarily of cash
on deposit with banks. At December 31, 1997, cash and cash equivalents included
a restricted certificate of deposit of $1,339 which was used to repay a note
payable in January 1998.
F-8
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Investments
Investments held by the Company consist primarily of investments in
high-quality, fixed-income bonds with varying maturities and rates. At December
31, 1996 and 1997, these investments totaled $5,975 and $4,003, respectively,
and are included in short-term investments and long-term other assets in the
accompanying supplemental consolidated balance sheets. In accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," debt securities that the Company has
both the intent and ability to hold to maturity are carried at amortized cost.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization have
been provided using the straight-line method over the estimated useful lives of
the assets, which range from two to seven years for furniture, equipment and
software, and the lease term for leasehold improvements. Repairs and maintenance
costs are charged to expense as incurred. Additions and betterments are
capitalized. Gains or losses on disposals are charged to operations. Certain
internally developed software costs totaling $171, have been capitalized in 1997
in accordance with the AICPA's Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which was
early adopted by DDI prior to its merger with the Company. These costs include
$142 of salaries and fringe benefits for software developers and $29 of
telecommunications and outside consultant costs. Such costs will be amortized,
beginning in 1998, using the straight-line method over the estimated useful life
of five years.
Intangible Assets
Intangible assets consist primarily of the excess of cost over the net asset
value of acquired businesses, customer lists, non-compete agreements and
employee bases. The excess of cost over the net asset value related to the May
1994 acquisition of Transcriptions, Ltd. (see Note 2) is being amortized over 40
years. The excess of cost over the net asset value related to other acquisitions
is being amortized over 20-30 years. Customer lists and employee bases are being
amortized over 10-20 years and five years, respectively. Non-compete agreements
are amortized over their terms, ranging from 1.5 years to four years. Subsequent
to its acquisitions, the Company continually evaluates whether later events and
circumstances have occurred that indicate that the remaining estimated useful
life of intangible assets may warrant revision or that the remaining balance may
not be recoverable. When factors indicate that intangible assets should be
evaluated for possible impairment, the Company uses an estimate of the related
undiscounted cash flows in measuring whether the intangible asset should be
written down to fair value. Measurement of the amount of the impairment will be
based on appraisal, market value of similar assets or estimated discounted
future cash flows resulting from the use and ultimate disposition of the assets.
As of December 31, 1997, management believes that no revision to the remaining
useful lives or write-down of intangible assets is required.
Preferred Stock Investment
During 1997, MRC invested $1,200 for an approximate 10% preferred stock equity
interest in Articulate Systems, Inc. The investment has been accounted for under
the cost method of accounting and is included in long-term other assets in the
accompanying supplemental consolidated balance sheets.
F-9
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
MRC Restructuring Charges
In 1995, MRC's board of directors approved a management plan to close certain
client service centers (CSC's) in order to reduce costs and improve operating
efficiencies. The cost of implementing the plan totaled approximately $347 and
was primarily related to long-term non-cancelable leases. The charge was
recognized in 1995 in accordance with the criteria set forth in EITF 94-3;
Liability Recognition For Costs to Exit An Activity (Including Certain Costs
Incurred In A Restructuring) and is reflected in the consolidated statement of
operations as restructuring charges.
In 1996, MRC's board of directors approved a separate management plan to close
and or merge several redundant CSC's as well as certain corporate offices in
order to reduce costs and improve operating efficiencies. The plan was
essentially completed during 1997 and included the cost of exiting certain
facilities, primarily related to non-cancelable leases, and employee severance
costs. Costs associated with the plan of approximately $644 have been recognized
in 1996 in accordance with EITF 94-3 and are reflected in the supplemental
consolidated statement of operations as restructuring charges.
In 1997, MRC's board of directors approved a separate management plan to close
and/or merge several redundant CSC's in order to further reduce costs and
improve operating efficiencies. The plan anticipated completion during 1998 and
included the cost of exiting certain facilities, primarily related to
non-cancelable leases and the disposition of fixed assets, and employee
severance costs. Costs associated with the plan of approximately $2,075 have
been recognized in 1997 in accordance with EITF 94-3 and are reflected in the
supplemental consolidated statement of operations as restructuring charges.
Included in this amount is approximately $705 for the disposal of assets and
approximately $800 in severance and employee contract buy outs. The balance is
primarily related to non-cancelable lease costs. The severance costs are
attributable to eight individuals from various levels of operational and senior
management.
As of December 31, 1996 and 1997, approximately $870 and $1,733 of these
activities had not been completed and are included in accrued expenses in the
supplemental consolidated balance sheets. All other costs have been paid or
charged to the accrual.
Advertising Costs
The Company charges advertising costs to expense as incurred. Advertising
expense was $191, $329 and $678 for the years ended December 31, 1995, 1996 and
1997, respectively.
Research and Development Costs
Research and development costs are expenses as incurred. There were no research
and development costs in 1995. Total research and development costs were
approximately $450 and $550 for the years ended December 31, 1996 and 1997,
respectively.
F-10
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Statements of Cash Flow Information
For the years ended December 31, 1995, 1996 and 1997, the Company paid interest
of $3,841, $1,404 and $1,027, respectively, and income taxes of $521, $1,700 and
$3,162, respectively. Capital lease obligations of $612, $191 and $174 were
incurred on equipment leases entered into in 1995, 1996 and 1997, respectively.
In 1996, $500 of debt was exchanged for shares of capital stock.
The following table displays the net noncash financing activities resulting from
the Company's business acquisitions accounted for under the purchase method (see
Note 2):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Noncash net assets acquired ............... $ 24,724 $ 35,724 $ 8,965
Less- Seller notes and payables ........... (22,714) (3,318) (3,337)
Common stock issued ....................... (185) (6,201) --
-------- -------- --------
Net cash paid for business acquisitions $ 1,825 $ 26,205 $ 5,628
======== ======== ========
</TABLE>
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Income Per Common Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This statement establishes new standards for computing and presenting
earnings per share and requires the restatement of prior year amounts. The
Company adopted SFAS No. 128 effective December 31, 1997.
Basic income per share is calculated by dividing net income by the weighted
average number of shares of Common stock outstanding for the period. Diluted
income per share is calculated by dividing net income by the weighted average
number of shares of Common stock outstanding for the period, adjusted for the
dilutive effect of Common stock equivalents, which consist of stock options,
using the treasury stock method.
F-11
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The table below sets forth the reconciliation of the numerators and denominators
of the basic and diluted income per share computations for income from
continuing operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------------------------
1995 1996 1997
--------------------------------- -------------------------------- ---------------------------------
PER PER PER
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic income from
continuing
operations ...... $2,361 10,289 $ 0.23 $5,288 24,138 $ 0.22 $8,733 31,726 $ 0.28
Effect of
dilutive
securities ...... -- 552 (0.01) -- 1,906 (0.02) -- 1,632 (0.02)
------ ------ ----- ------ ------ ------ ------ ------ ------
Diluted income
from continuing
operations ...... $2,361 10,841 $ 0.22 $5,288 26,044 $ 0.20 $8,733 33,358 $ 0.26
====== ====== ===== ====== ====== ======= ====== ====== ======
</TABLE>
For the years ended December 31, 1995, 1996 and 1997, 645, 1,288 and 1,961
Common stock options and warrants were excluded from the diluted computation
because their effect would be anti-dilutive.
New Accounting Pronouncement
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. Management believes that SFAS
No. 131 will have no effect on the Company's financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. ACQUISITIONS
Effective May 1, 1994, the Company purchased substantially all of the assets of
Transcriptions, Ltd. and affiliates ("Transcriptions"), as well as assumed
certain liabilities, as defined, for $16,930 in cash, including acquisition
costs of $322, plus the payment of Transcriptions' interest bearing debt of
$5,816, plus a deferred purchase price based on future operating results.
Effective December 29, 1995, and in connection with the sale of the receivables
management division (see Note 3), the Company fixed the deferred purchase price
by agreeing to pay the former owners of Transcriptions $18,375 in cash and issue
2,584 shares of Common stock (valued at $4,550 for financial reporting purposes)
on August 31, 1996.
F-12
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
2. ACQUISITIONS -- (CONTINUED)
The total purchase price for the Transcriptions acquisition was $44,797. The
acquisition has been accounted for using the purchase method with the purchase
price allocated to the fair value of the acquired assets and liabilities.
In July 1996, MRC acquired all of the outstanding capital stock of Medical
Records Corp. The former shareholders of Medical Records Corp. received total
consideration of approximately $27,000, consisting of cash, notes and shares of
Common stock. The acquisition was accounted for as a purchase, and the results
of Medical Records Corp. are included in the accompanying supplemental
consolidated financial statements from the date of the acquisition. In
connection with the acquisition, MRC assumed certain acquisition-related
liabilities from Medical Records Corp. The cost of the acquisition has been
allocated on the basis of the estimated fair market value of the assets acquired
and liabilities assumed. The allocation resulted in goodwill and other
intangible assets of approximately $33,015, which are being amortized over lives
of 1.5 to 30 years.
The following unaudited pro forma summary presents the results of operations of
the Company as if the payment of the Transcriptions deferred purchase price,
which causes additional amortization and interest expense, and the Medical
Records Corp. acquisition had occurred on January 1, 1995.
YEAR ENDED DECEMBER 31
------------------------
1995 1996
---- ----
Revenues ..................................... $ 152,259 $ 179,683
Income (loss) from continuing operations ..... (4,053) 726
Basic and diluted income (loss) per share from
continuing operations ................... (.39) .03
From 1995 through 1997, the Company completed several smaller acquisitions
accounted for using the purchase method. Pro forma information is not presented
as these acquisitions are not material to the Company.
Certain of the acquisitions provide for additional consideration to be paid if
net future billings to defined customers exceed specified contractual levels.
These provisions expire in 2000 and 2001, and are generally payable on a
quarterly basis. When the contingency is resolved and additional consideration
is due, the Company accounts for the payment as additional purchase price and
amortizes the additional amount paid over the remaining life of the asset.
In 1998, the Company completed certain acquisitions accounted for under the
pooling-of-interests method (see Note 11).
3. DISCONTINUED OPERATIONS
In December 1995, the Company sold its receivables management business for total
consideration of $17,330. The accompanying financial statements reflect the
receivables management business as discontinued operations. For the year ended
December 31, 1995, the discontinued operation generated revenue of $18,767 and
net income of $1,451. The 1995 divestiture generated an after-tax loss of
$3,180, which includes net income of $113 related to operations from the
November 14, 1995 measurement date through the December 29, 1995 disposal date.
F-13
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
4. PROPERTY AND EQUIPMENT
DECEMBER 31
-----------------------
1996 1997
---- ----
Furniture, equipment and software ............. $ 37,098 $ 46,608
Leasehold improvements ........................ 911 1,341
-------- --------
38,009 47,949
Less- Accumulated depreciation and amortization (16,711) (22,507)
-------- --------
$ 21,298 $ 25,442
======== ========
In 1995, MRC evaluated the remaining estimated useful lives of certain
equipment, including dictation equipment and related software. As a result, the
remaining lives of these assets were shortened, which resulted in an increase in
depreciation expense of $741 in 1995.
5. INTANGIBLE ASSETS
DECEMBER 31
----------------------
1996 1997
-------- --------
Excess of cost over net asset value of
acquired businesses ................ $ 62,940 $ 64,600
Customer lists ....................... 14,880 21,552
Non-compete agreements ............... 3,305 3,405
Employee base ........................ 2,439 2,514
Other ................................ 122 137
-------- --------
83,686 92,208
Less- Accumulated amortization ....... (4,155) (9,826)
-------- --------
$ 79,531 $ 82,382
======== ========
F-14
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1997
-------- --------
<S> <C> <C>
Line of credit ................................................. $ 329 $ 132
Note payable to bank ........................................... 6,650 5,250
Note payable to former shareholders' of
Medical Records Corp. ...................................... 2,000 2,000
Subordinated convertible 6% promissory note, due September 2003,
converted in January 1998 .................................. 1,288 1,288
Promissory notes, repaid in January 1998 ....................... 979 3,797
Capital lease obligations ...................................... 2,910 1,786
Other .......................................................... 199 128
-------- --------
14,355 14,381
Less- current portion .......................................... (4,391) (6,792)
-------- --------
$ 9,964 $ 7,589
======== ========
</TABLE>
On April 23, 1997, the Company amended its credit facility to provide for a $10
million unsecured senior revolving line of credit through April 23, 2000. The
revolver bears interest at resetting rates selected by the Company from various
alternatives. The interest rate alternatives are either (i) the greater of (x)
prime rate, (y) the federal funds rate plus 0.5% (z) the bank's certificate of
deposit rate plus 1%, or (ii) LIBOR plus 0.75%. The credit facility also allows
for the Company to finance up to 100% of any acquisitions of companies that are
in the business of providing transcriptions-related services. The financing of
these acquisitions may be carved out of the revolver and amortized over 20
consecutive quarters. Each acquisition term loan that is created would
permanently reduce the remaining borrowings under the revolver.
In addition to acquisitions, the revolver can be used for working capital and
general corporate purposes. To the extent any amounts under the revolver are
repaid, other than acquisition term loans, the Company may reborrow such
amounts. The credit facility requires the Company to maintain certain financial
and non-financial covenants, including limitations on capital expenditures and
dividends.
For the year ended December 31, 1997, the Company did not incur any interest
expense on the revolving credit facility as there were no borrowings on this
credit facility during the year. For the years ended December 31, 1995 and 1996,
the Company incurred interest expense of $498 and $49 on the revolving credit
facility, at a weighted average interest rate of 8.96% and 9.78%. The highest
outstanding borrowings under the revolver during 1995 and 1996 were $7,332 and
$2,534, respectively.
In connection with the acquisition of Medical Records Corp., MRC entered into a
note agreement with a bank. The note was for $7,000 with an interest rate of
LIBOR plus 1.65%, which totals approximately 7.3% at December 31, 1997. The note
is secured by substantially all of MRC's assets. The agreement requires the
payment of interest quarterly along with equal monthly principal payments of
$117 through September 2001. The note requires the maintenance of certain
financial covenants, including a minimum net income covenant.
F-15
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
6. LONG-TERM DEBT -- (CONTINUED)
In connection with the acquisition of Medical Records Corp., MRC issued seven
year, 8% unsecured notes to former shareholders of Medical Records Corp. for
$2,000. The notes require the payment of interest quarterly, with annual
principal payments of $500 beginning in July 2000.
In December 1995, MedQuist restructured its prior credit facility. In connection
with the restructuring, the Company charged to expense, as an extraordinary
item, the related deferred financing costs of $826, increasing the 1995 net loss
by $545.
In January 1998, the subordinated convertible 6% promissory note was converted
into 172 shares of Common stock at a conversion price of $7.48 per share.
Long-term debt maturities as of December 31, 1997, are as follows:
1998 ................................. $ 6,792
1999 ................................. 1,736
2000 ................................. 1,972
2001 ................................. 1,585
2002 ................................. 508
2003 and thereafter .................. 1,788
----------
$ 14,381
==========
7. SHAREHOLDERS' EQUITY
On September 9, 1997, the Company effected a three-for-two stock split for all
shares of Common stock. Further, on June 15, 1998, the Company effected a
two-for-one stock split for all shares of Common stock.
In May 1996, MedQuist consummated a secondary public offering of its Common
stock, selling 6,600 shares at a price of $5.67 per share. In June 1996, the
underwriters exercised their overallotment option for an additional 922 shares.
After deducting the underwriters' discount and offering expenses, the net
proceeds to the Company were $39,442.
In connection with the 1992 issuance of a senior subordinated note, the Company
sold to the holder for $1,100 warrants to purchase 1,732 shares of Class A and
1,068 shares of Class B Preferred Stock at an exercise price of $2.50 per share.
Each share of Class A and Class B Preferred Stock was convertible into one share
of Common stock. During 1994, the holder was issued additional warrants and all
warrant exercise prices were reset at $2.43, in accordance with the antidilution
provisions of the original warrant agreement. Simultaneous with the closing of
the secondary stock offering, the Company and the holder agreed that the holder
would exercise the warrants by tendering the $7,000 principal amount of the
senior subordinated notes and simultaneously converting the shares of Preferred
stock received upon such exercise into 2,888 shares of Common stock. As an
inducement for the holder to exercise the warrants and convert the Preferred
stock, the Company issued the holder 128 additional shares of Common stock. This
inducement, valued at $707 or $0.04 per diluted share, has been recorded as a
deduction from the net income available to common shareholders in 1996.
F-16
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
7. SHAREHOLDERS' EQUITY
In connection with the Company's May 1994 credit agreement, the Company issued
the agent bank warrants to purchase 226 shares of Common stock at an exercise
price of $2.25 per share. These warrants were exercised on June 12, 1997 by the
agent bank for proceeds to the Company of $508.
In connection with the sale of equity securities to certain investors in 1992
and 1993, warrants to purchase Common stock were issued by MRC to these
investors. The warrants were fully vested and exercisable at the date of
issuance and have terms which permit conversion into Common stock at specified
prices during periods ranging from four to five years. The fair value of the
warrants at the date of grant was de minimis and therefore no compensation
expense has been recorded in the accompanying financial statements. At December
31, 1996 and 1997, warrants to purchase 194 shares at a weighted average
exercise price of $12.69 were outstanding. All of the warrants outstanding at
December 31, 1997 are exercisable. The warrants were exercised in 1998.
8. STOCK OPTION PLANS
MedQuist has three stock option plans that provide for the granting of options
to purchase an aggregate of 5,860 shares of Common stock to eligible employees
(including officers) and nonemployee directors of the Company. Options granted
may be at fair market value of the Common stock or at a price determined by a
committee of the Company's board of directors. The stock options vest and are
exercisable over periods determined by the committee.
Information with respect to MedQuist's options is as follows:
OPTION PRICE AGGREGATE
SHARES PER SHARE PROCEEDS
------ ------------- --------
Outstanding, December 31, 1994 1,500 $0.67 -$ 2.25 $ 2,510
Granted ................... 918 2.42 - 3.17 2,594
Exercised ................. (520) 0.67 - 2.42 (796)
Canceled .................. (136) 0.67 - 2.25 (259)
------ ------------- --------
Outstanding, December 31, 1995 1,762 0.67 - 3.17 4,049
Granted ................... 961 2.80 - 6.94 4,509
Exercised ................. (98) 1.14 - 5.13 (226)
Canceled .................. (90) 3.17 (285)
------ ------------- --------
Outstanding, December 31, 1996 2,535 1.14 - 6.94 8,047
Granted ................... 918 5.21 - 16.52 10,988
Exercised ................. (533) 1.14 - 10.41 (1,277)
Canceled .................. (94) 4.37 - 16.52 (481)
------ ------------- --------
Outstanding, December 31, 1997 2,826 $1.14 -$16.52 $ 17,277
===== ========
At December 31, 1997, there were 1,255 exercisable options at an aggregate
exercise price of $3,664 and 624 additional options available for grant under
the plans.
F-17
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
8. STOCK OPTION PLANS -- (CONTINUED)
The options outstanding and exercisable by exercise price at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUSTANDING LIFE PRICE EXERCISABLE PRICE
---------------- ---------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.14 - $ 3.83 1,365 6.15 $ 2.40 1,135 $ 2.33
5.13 - 11.31 894 8.72 6.54 90 6.68
13.82 - 16.52 567 9.96 14.41 30 13.81
------ ----- ------- ----- ------
2,826 7.73 $ 6.11 1,255 $ 2.92
====== ===== ======= ===== ======
</TABLE>
MRC has reserved 1,291 shares of Common stock for issuance under its Amended and
Restated 1992 Employee Stock Option Plan (the "Plan"). The options have been
granted at amounts equal to or in excess of the fair market value of MRC's
Common stock as determined by the board of directors. The options vest over
periods ranging from the date of grant to five years as determined by the board
of directors at the date of grant. As of December 31, 1997, the Company had 774
shares outstanding under the Plan and 480 shares available for grant.
The board of directors also has issued options in addition to those issued under
the Plan. The number of shares that may be granted under this arrangement has
not been limited. These options have been granted at amounts equal to or in
excess of fair market value of MRC's Common stock as determined by the board of
directors. The options vest over periods ranging from the date of grant to ten
years as determined by the board of directors at the date of grant. As of
December 31, 1997, the board of directors had granted 647 shares under this
arrangement.
F-18
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
8. STOCK OPTION PLANS -- (CONTINUED)
Information with respect to MRC's options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
------ ------------ --------
<S> <C> <C> <C>
Outstanding, December 31, 1994 653 $ 8.19 - $13.56 $ 12.76
Granted ................................ 659 8.19 - 12.45 8.70
Forfeited/canceled ..................... (631) 12.45 - 13.56 12.47
Exercised ............................. (36) 8.19 8.19
------- ---------------- ----------
Outstanding, December 31, 1995 ............ 645 8.19 - 12.45 8.64
Granted ................................ 709 8.31 - 10.48 10.09
Forfeited/canceled ..................... (66) 8.31 - 12.45 8.44
------- ---------------- ----------
Outstanding, December 31, 1996 ............ 1,288 8.19 - 12.45 9.45
Granted ................................ 232 10.48 10.48
Forfeited/canceled ..................... (99) 8.31 - 12.45 9.59
------- ---------------- -----------
Outstanding, December 31, 1997 ............ 1,421 $ 8.19 - $12.45 $ 9.37
====== ================= ==========
Options exercisable at December 31, 1997 .. 741 $ 8.19 - $12.45 $ 9.10
====== ================ ==========
</TABLE>
The weighted average grant date fair value of MRC options granted during 1995,
1996 and 1997 was $8.70, $10.09 and $10.48, respectively. The weighted average
remaining contractual life of the MRC stock options outstanding at December 31,
1997 was 8.05 years.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and the related interpretations in accounting for
its stock option plans. Had compensation cost for the Company's Common stock
options been determined based upon the fair value of the options at the date of
grant, as prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income (loss) available to common shareholders
would have been the following pro forma amounts:
YEAR ENDED DECEMBER 31
-----------------------------------
1995 1996 1997
------ -------- --------
Net income (loss):
As reported ..................... $ 87 $ 4,581 $ 8,733
Pro Forma ....................... (758) (1,893) (6,656)
Basic net income (loss) per share:
As reported ..................... .01 .19 .28
Pro forma ....................... (.07) (.08) (.21)
Diluted net income (loss) per share:
As reported ..................... .01 .17 .26
Pro forma ....................... (.07) (.08) (.21)
F-19
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
8. STOCK OPTION PLANS -- (CONTINUED)
The fair value of the options granted is estimated using the Black-Scholes
option pricing model with the following assumptions: dividend yield of 0.0%,
volatility of 50.0%-55.0%, risk-free interest rates of 5.3% to 8.0%, and
expected lives of five to ten years. The above pro forma amounts may not be
indicative of future amounts because option grants prior to January 1, 1995 have
not been included and because future option grants are expected.
9. INCOME TAXES
The income tax provision consists of the following:
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1996 1997
------- ------- -------
Current:
State and local....... $ 181 $ 79 $ 1,176
Federal .............. 161 1,536 4,317
------- ------- -------
342 1,615 5,493
Deferred ................. (146) 1,105 (200)
------- ------- -------
$ 196 $ 2,720 $ 5,293
======= ======= =======
YEAR ENDED DECEMBER 31
--------------------------------------
1995 1996 1997
------- ------- -------
Continuing operations .... $ 640 $ 2,720 $ 5,293
Discontinued operations:
Income from operations 796 -- --
Loss on disposal ..... (959) -- --
Extraordinary item ....... (281) -- --
------- ------- -------
$ 196 $ 2,720 $ 5,293
======= ======= =======
F-20
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
9. INCOME TAXES -- (CONTINUED)
A reconciliation of the statutory federal income tax rate to the effective
continuing operations income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate .................. 34.0 % 34.0 % 35.0 %
State income taxes, net of federal benefit ......... 6.5 % 3.0 % 3.0 %
Impact of Signal and TLF "S" Corporation status .... (22.2)% (8.0)% (4.9)%
Other .............................................. 3.0 % 5.0 % 4.6 %
---- ---- ----
21.3 % 34.0 % 37.7 %
==== ==== ====
</TABLE>
Signal and TLF were taxed as an "S" Corporation prior to their mergers with
MedQuist. Accordingly, the former Signal and TLF shareholders were taxed
individually on their companies' taxable income. Therefore, no tax provision is
included in the accompanying supplemental financial statements related to Signal
and TLF's net income (see Note 1).
The tax effected temporary differences that give rise to deferred income taxes
are as follows:
DECEMBER 31
--------------------
1996 1997
------- -------
Deferred tax asset:
Restructuring accruals .... $ 119 $ 602
Carryforwards ............. 2,005 338
Accruals and reserves ..... 1,570 2,237
------- -------
$ 3,694 $ 3,177
======= =======
Deferred tax liability:
Accumulated depreciation ... $(1,522) $(1,475)
Accumulated amortization ... (3,970) (3,518)
Deferred compensation ...... 224 210
Other ...................... (1,601) (1,711)
------- -------
$(6,869) $(6,494)
======== =======
MRC has a net operating loss carryforward of approximately $441 at December 31,
1997 that expires through 2011. MRC also has alternative minimum tax credit
carryforwards of $162 at December 31, 1997. It is expected that these
carryforwards will be utilized in 1998 prior to MRC's merger with MedQuist.
At December 31, 1997, the tax bases of Signal's net assets approximated their
reported amount for financial statement purposes. However, Signal and the
Company have elected to treat their merger as an asset purchase for income tax
purposes. Accordingly, the Company recorded a deferred tax asset and an increase
in additional paid-in capital of approximately $4,600 in the quarter ended
September 30, 1998, which represents the tax effect of goodwill that will be
recorded for income tax purposes.
F-21
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
10. COMMITMENTS AND CONTINGENCIES
Rent expense for operating leases was $2,433, $5,053 and $4,599 for the years
ended December 31, 1995, 1996 and 1997, respectively. Minimum annual rental
commitments for noncancelable operating leases having terms in excess of one
year as of December 31, 1997, are as follows:
1998 .......................... $ 4,921
1999 .......................... 3,899
2000 .......................... 2,733
2001 .......................... 1,588
2002 .......................... 682
2003 and thereafter ........... 230
--------
$ 14,053
The Company has an employment agreement, as amended, with a former Chief
Executive Officer who is currently a director of the Company. The agreement
entitles this individual to receive retirement benefits of $75 per year for life
plus certain other benefits, as defined. Included in other long-term liabilities
is $631 and $544 at December 31, 1996 and 1997, respectively, related to these
retirement benefits. The employment agreement also requires the Company to loan
the former Chief Executive Officer's estate the necessary funds to exercise any
options owned by the individual at the time of his death.
The Company has a severance plan for certain executive officers that provides
for one-time payments in the event of a change in control, as defined. No
liabilities are currently required to be recorded with respect to this plan.
In the normal course of business, the Company is a party to various claims and
legal proceedings. Although the ultimate outcome of these matters is presently
not determinable, management of the Company, after consultation with legal
counsel, does not believe that the resolution of these matters will have a
material effect upon the Company's financial position or results of operations.
11. ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1997
On May 28, 1998, the Company completed the acquisition of approximately 94% of
the outstanding capital stock of DDI and on July 31, 1998 acquired the remaining
shares. The Company issued 912 shares in exchange for all DDI shares. The
acquisition was accounted for using the pooling-of-interests method of
accounting. Accordingly, the Company's historical financial statements were
retroactively restated to reflect the combination with DDI.
On August 18, 1998, the Company completed the acquisition of Signal, which was
accounted for using the pooling-of-interests method. The Company issued 619
shares of its Common stock and approximately $1,500 in cash in exchange for all
Signal capital stock. The Company's historical financial statements have been
restated to reflect the combination with Signal. Signal and the Company have
elected to treat their merger as an asset purchase for income tax purposes. The
Company recorded a deferred tax asset of approximately $4,600 that was credited
directly to shareholders' equity in the quarter ended September 30, 1998 to
reflect the tax effect of goodwill that will be recorded for tax purposes (see
Note 9).
On November 30, 1998, the Company completed the acquisition of TLF, which will
be accounted for using the pooling-of-interests method. The Company issued 800
shares of its Common stock for all TLF capital stock.
F-22
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
11. ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1997 -- (CONTINUED)
Accordingly, the Company's supplemental consolidated financial statements have
been restated to reflect the combination with TLF.
On September 18, 1998 the Company signed a definitive merger agreement with MRC
and on December 10, 1998, the merger was consummated. Pursuant to the agreement,
the Company exchanged each share of MRC Common stock and each share of MRC
Preferred stock on an as-converted basis for 0.5163 shares of its Common stock.
In total, the Company issued 8,662 shares of its Common stock to the former MRC
shareholders and options to purchase an aggregate of 1,543 shares to the former
MRC option holders. The MRC merger will be accounted for as a
poling-of-interests. Accordingly, the Company's supplemental consolidated
financial statements have been restated to reflect the merger with MRC.
Revenue and net income as previously reported for the years ended December 31,
1995, 1996 and 1997, and as restated for the pooling of interests transactions
is as follows:
YEAR ENDED
DECEMBER 31, 1997
-------------------------
REVENUES NET INCOME
-------- ----------
MedQuist, as previously reported ..... $ 84,590 $ 7,631
DDI .................................. 10,026 616
Signal ............................... 9,294 1,100
TLF .................................. 4,131 712
MRC .................................. 108,117 (1,326)
-------- --------
Restated ............................. $216,158 $ 8,733
======== ========
YEAR ENDED
DECEMBER 31, 1996
-------------------------
REVENUES NET INCOME
-------- ----------
MedQuist, as previously reported ..... $ 61,480 $ 3,477
DDI .................................. 6,937 440
Signal ............................... 8,058 842
TLF .................................. 3,934 882
MRC .................................. 71,700 (1,060)
-------- --------
Restated ............................. $152,109 $ 4,581
======== ========
YEAR ENDED
DECEMBER 31, 1995
-------------------------
REVENUES NET INCOME
-------- ----------
MedQuist, as previously reported ..... $ 45,127 $ (1,667)
DDI .................................. 5,058 104
Signal ............................... 7,120 1,135
TLF .................................. 3,172 642
MRC .................................. 49,180 (127)
-------- --------
Restated ............................. $109,657 $ 87
======== ========
F-23
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
11. ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1997 -- (CONTINUED)
Prior to their mergers with the Company, Signal and TLF were taxed as "S"
Corporations. The above net income (loss) amounts do not include a "C"
Corporation income tax provision for Signal and TLF of approximately $672, $637
and $682 for the years ended December 31, 1995, 1996 and 1997, respectively.
12. QUARTERLY SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)
Year Ended December 31, 1997:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues ......................... $49,914 $52,999 $55,269 $57,976
Income before income taxes ....... 3,283 4,557 4,632 1,554
Net income ....................... 2,058 2,931 2,910 834
Basic net income per share ....... 0.07 0.10 0.10 0.02
Diluted net income per share ..... 0.06 0.09 0.09 0.02
</TABLE>
F-24
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 14,489 $ 25,207
Accounts receivable, net of allowance of $1,298 and $1,821 ............ 41,819 47,494
Prepaid expenses and other current assets ............................. 7,181 3,666
-------- --------
Total current assets ................................... 63,489 76,367
Property and equipment, net .............................................. 25,442 27,184
Other assets ............................................................. 2,154 4,132
Intangible assets, net ................................................... 82,382 83,116
-------- --------
$173,467 $190,799
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ..................................... $ 6,792 $ 2,038
Accounts payable ...................................................... 5,777 4,879
Accrued expenses ...................................................... 14,618 23,736
-------- --------
Total current liabilities .............................. 27,187 30,653
Long-term debt ........................................................... 7,589 4,982
Other liabilities ........................................................ 1,130 751
Deferred income taxes .................................................... 6,188 3,131
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock, no par value, 60,000 shares authorized, 32,138 and 33,123
shares issued and outstanding ....................................... -- --
Additional paid-in capital ............................................ 119,008 127,930
Retained earnings ..................................................... 12,365 22,767
Unrealized gain on marketable securities .............................. -- 585
-------- --------
Total shareholders' equity ............................. 131,373 151,282
-------- --------
$173,467 $190,799
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL (UNAUDITED) CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
Nine Months Ended September 30,
-------------------------------
1997 1998
---- ----
Revenues ................................. $ 158,182 $ 199,790
Costs and expenses:
Cost of revenues ...................... 123,112 154,041
Selling, general and administrative ... 10,692 12,831
Depreciation .......................... 7,454 9,470
Amortization .......................... 4,090 2,794
Transaction costs ..................... -- 2,182
--------- ---------
Total operating expenses 145,348 181,318
Operating income ......................... 12,834 18,472
Interest income (expense), net ........... (362) 211
--------- ---------
Income before income taxes ............... 12,472 18,683
Income tax provision ..................... 4,573 6,935
--------- ---------
Net income ............................... $ 7,899 $ 11,748
========= =========
Basic net income per share ............... $ 0.25 $ 0.36
========= =========
Diluted net income per share ............. $ 0.24 $ 0.34
========= =========
Pro forma amounts (Note 3):
Income before income taxes, as reported $ 12,472 $ 18,683
Income tax provision .................. 5,132 7,405
--------- ---------
Net income ............................ $ 7,340 $ 11,278
========= =========
Basic net income per share ............ $ 0.23 $ 0.34
========= =========
Diluted income per share .............. $ 0.23 $ 0.33
========= =========
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SUPPLEMENTAL (UNAUDITED) CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ......................................................... $ 7,899 $ 11,748
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Compensation expense for stock options ................................ -- 404
Deferred tax provision ................................................ 388 (270)
Loss on disposal of property .......................................... 90 1
Depreciation and amortization ......................................... 11,544 12,264
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures--
Accounts receivable, net .......................................... (4,873) (5,362)
Prepaid expenses and other current assets ......................... 78 (824)
Other assets ...................................................... 8 (110)
Accounts payable .................................................. 435 (898)
Accrued payroll ................................................... 1,807 2,533
Accrued expenses .................................................. 1,121 6,689
Other long-term liabilities ....................................... (69) (68)
-------- --------
Net cash provided by operating activities .................. 18,428 26,107
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment ....................................... (10,397) (11,203)
Acquisitions, net of cash acquired ........................................ (5,153) (5,804)
Purchases of investments .................................................. 1,202 4,610
-------- --------
Net cash used in investing activities ........................... (14,348) (12,397)
-------- --------
FINANCING ACTIVITIES:
Net borrowings on revolving line of credit ................................ (329) 60
Repayments of long-term debt .............................................. (2,114) (5,287)
Repayments of obligations under capital leases ............................ (229) (380)
Net proceeds from issuance of Common stock ................................ 1,485 --
Proceeds from exercise of Common stock options ............................ -- 1,668
Distributions ............................................................. (860) (1,014)
Repurchase and retirement of Common stock ................................. (467) --
Proceeds from the exercise of warrants .................................... -- 1,961
-------- --------
Net cash used in financing activities ............................. (2,514) (2,992)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................................... 1,566 10,718
CASH AND CASH EQUIVALENTS, BEGINNINGOF PERIOD ................................ 14,940 14,489
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................... $ 16,506 $ 25,207
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest .................................................................. $ 792 $ 467
======== ========
Income taxes .............................................................. $ 2,059 $ 5,006
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
F-27
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(IN THOUSANDS)
NOTE 1. BASIS OF PRESENTATION
The information set forth in these statements is unaudited. The information
reflects all adjustments, consisting of normal recurring adjustments that, in
the opinion of management, are necessary for a fair presentation. Results of
operations for the period ended September 30, 1998 are not necessarily
indicative of the results of operations for the full year. Certain information
in footnote disclosures normally included in financial statements have been
condensed or omitted in accordance with the rules and regulations of the
Securities and Exchange Commission.
On November 30, 1998 and December 10, 1998, the Company consummated the
acquisitions of Transcriptions Ltd. of Florida, Inc. ("TLF") and The MRC Group,
Inc. ("MRC"), respectively, which will be accounted for using the
pooling-of-interests method. Accounting Principles Board Opinion No. 16
precludes the restatement of financial statements for a pooling-of-interests
transaction prior to the issuance of financial statements covering a period
encompassed by the transaction. Accordingly, the accompanying consolidated
financial statements set forth a supplemental presentation of the Company's
financial statements retroactively restated to reflect the combinations with TLF
and MRC (see Note 3). The accompanying supplemental consolidated financial
statements do not include the estimated transaction costs related to the TLF and
MRC acquisitions of $9,500, and costs associated with known bonus and severance
arrangements with former MRC employees of approximately $1,600, which will be
charged to expense in the quarter ended December 31, 1998. In addition, the
Company expects to record a restructuring charge in the quarter ended December
31, 1998 for certain costs associated with combining the companies, primarily
severance and duplicate faculty leases.
NOTE 2. MRC RESTRUCTURING CHARGES
In 1995, 1996 and 1997, MRC's board of directors approved various management
plans which resulted in restructuring charges in the amounts of $347, $644 and
$2,075, respectively. The charges were recorded in accordance with the criteria
set forth in EITF 94-3; Liability Recognition For Costs To Exit An Activity
(Including Certain Costs Incurred In A Restructuring). During the first nine
months of 1998, non-cancelable lease costs of $196, asset disposal costs of $291
and severance costs of $110 were paid and charged against the restructuring
accrual. At September 30, 1998, the remaining accrued restructuring costs
balance in accrued liabilities is $1,136. The components of this balance include
$556 for non-cancelable lease costs, $414 for asset disposal costs and $166 for
severance and employee contract buy-outs. The Company anticipates that the
restructuring will be completed during 1998, however, certain accrued
restructuring costs will remain outstanding until all obligations are paid.
NOTE 3. ACQUISITIONS
During 1998, the Company completed three acquisitions accounted for using the
purchase method and one immaterial acquisition accounted for using the
pooling-of-interest method. Pro forma information is not presented as the
acquisitions are not material to the Company.
On May 28, 1998, the Company completed the acquisition of approximately 94% of
the outstanding capital stock of Digital Dictation, Inc. ("DDI" and on July 31,
1998 acquired the remaining shares. The Company issued 912 shares in exchange
for all DDI shares. The acquisition was accounted for using the
pooling-of-interests method of accounting. Accordingly, the Company's historical
financial statements were retroactively restated to reflect the combination with
DDI.
F-28
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED -- IN THOUSANDS)
NOTE 3. ACQUISITIONS -- (CONTINUED)
On August 18, 1998, the Company completed the acquisition of Signal
Transcriptions Network, Inc. ("Signal"), which was accounted for using the
pooling-of-interests method. The Company issued 619 shares of its Common stock
and $l.5 million in cash in exchange for all Signal capital stock. The Company's
historical financial statements have been restated to reflect the combination
with Signal. Signal and the Company have elected to treat their merger as an
asset purchase for income tax purposes. The accompanying consolidated balance
sheets include a deferred tax asset of approximately $4,600 that was credited
directly to shareholders' equity in the quarter ended September 30, 1998 to
reflect the tax effect of goodwill recorded for tax purposes in the Merger.
On November 30, 1998, the Company completed the acquisition of TLF, which will
be accounted for using the pooling-of-interests method. The Company issued 800
shares of its Common stock for all TLF capital stock. Accordingly, the Company's
supplemental consolidated financial statements have been restated to reflect the
combination with TLF.
On September 18, 1998 the Company signed a definitive merger agreement with MRC
and on December 10, 1998, the merger was consummated. Pursuant to the agreement,
the Company exchanged each share of MRC Common stock and each share of MRC
Preferred stock on an as-converted basis for 0.5163 shares of its Common stock.
In total, the Company issued 8,662 shares of its Common stock to the former MRC
shareholders and options to purchase an aggregate of 1,543 shares to the former
MRC option holders. The MRC merger will be accounted for as a
poling-of-interests. Accordingly, the Company's supplemental consolidated
financial statements have been restated to reflect the merger with MRC.
Revenues and net income as previously reported for the nine months ended
September 30, 1997 and 1998 and as restated for the pooling of interests
transactions is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
-------------------------- ----------------------------
REVENUES NET INCOME REVENUES NET INCOME
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
MedQuist, as previously reported $ 60,707 $ 5,422 $ 92,914(a) $ 8,258(a)
DDI ............................ 7,039 425 6,165(b) 253(b)
Signal ......................... 6,834 979 5,281(b) 543(b)
TLF ............................ 3,075 490 3,688 522
MRC ............................ 80,527 583 91,742 2,172
-------- -------- -------- --------
Restated ....................... $158,182 $ 7,899 $199,790 $ 11,748
======== ======== ======== ========
</TABLE>
(a) Includes DDI and Signal amounts from July 1, 1998.
(b) Reflects amounts from January 1, 1998 to June 30, 1998.
Prior to their mergers with the Company, Signal and TLF were taxed as "S"
Corporations. The above net income amounts do not include a "C" Corporation
income tax provision for Signal and TLF of approximately $559 and $470 for the
nine months ended September 30, 1997 and 1998, respectively.
F-29
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED -- IN THOUSANDS)
NOTE 4. NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." This statement established new standards for computing and presenting
earnings per share and requires the restatement of prior year amounts. The
Company adopted SFAS No. 128 effective December 31, 1997.
Basic net income per share is calculated by dividing net income by the weighted
average number of shares of Common stock outstanding for the period. Diluted net
income per share is calculated by dividing net income by the weighted average
number of shares of Common stock outstanding for the period, adjusted for the
dilutive effective of Common stock equivalents, which consist of stock options,
using the treasury stock method.
The table below sets forth the reconciliation of the numerators and denominators
of the basic and diluted net income per share computations:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
1997 1998
--------------------------------------- ---------------------------------------
NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic ............ $ 7,899 31,600 $ 0.25 $11,748 32,322 $ 0.36
Effect of dilutive
securities .... -- 1,531 (0.01) -- 2,308 (0.02)
------- ------- -------- ------- ------- --------
Diluted .......... $ 7,899 33,131 $ 0.24 $11,748 34,630 $ 0.34
======= ======= ======== ======= ======= ========
</TABLE>
NOTE 5. NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of and
Enterprise and Related Information." This statement establishes new standards
for segment reporting in the financial statements and is effective for fiscal
years beginning after December 15, 1997. Management believes that SFAS No. 131
will have no effect on the Company's financial statements
NOTE 6. SHAREHOLDERS' EQUITY
On September 9, 1997, the Company effected a three-for-two stock split for all
shares of Common stock. On June 15, 1998, the Company effected a two-for-one
stock split for all shares of Common stock. All shares and per share amounts
have been restated for the stock splits.
F-30
<PAGE>
PART II
Information not Required in the Prospectus
Item 14. Other Expenses of Issuance and Distribution.
The following table shows the estimated expenses of the issuance and
distribution of the securities offered.
SEC Registration Fee $ 6,777*
Legal fees and expenses 2,000**
Accounting fees and expenses 2,000**
Transfer agent and registrar fees 1,000**
Printing and Miscellaneous 1,000**
---------
TOTAL $ 12,777
==========
- -------------------
* Actual
** Estimated.
Item 15. Indemnification of Directors and Officers
Section 14A:3-5 of the Business Corporation Act of the State of New
Jersey ("NJBCA") permits each New Jersey business corporation to indemnify its
directors, officers, employees and agents against expenses and liability for
each such person's acts taken in his or her capacity as a director, officer,
employee or agent of the corporation if such actions were taken in good faith
and in a manner which he or she reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal
proceeding, if he or she had no reasonable cause to believe his or her conduct
was unlawful. Article 10 of the Company's Bylaws provides that the Company, to
the full extent permitted by Section 14A:3-5 of the NJBCA, shall indemnify all
past and present directors or officers of the Company and may indemnify all past
or present employees or other agents of the Company. To the extent that a
director, officer, employee or agent of the Company has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to in
such Article 10, or in defense of any claim, issue, or matter therein, he or she
shall be indemnified by the Company against expenses in connection therewith.
Such expenses shall be paid by the Company in advance of the final disposition
of the action, suit or proceeding as authorized by the Company's Board of
Directors upon receipt of an undertaking to repay the advance if it is
ultimately determined that such person is not entitled to indemnification.
The Company has a policy insuring it and its directors and officers
against certain liabilities, including liabilities under the Securities Act.
II-1
<PAGE>
Reference is made to Item 17 of this Registration Statement for
additional information regarding indemnification of directors and officers.
Item 16. Exhibits
4.1 Specimen Stock Certificate (Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-1
(No. 333-3050) filed with the Commission on April 1, 1996).
5.1 Opinion of John M. Suender, Senior Vice President and General Counsel.*
23.1 Consent of Arthur Andersen LLP, filed herewith.
23.2 Consent of Arthur Andersen LLP, filed herewith.
23.3 Consent of Skoda, Minotti, Reeves & Co., filed herewith.
23.4 Consent of John M. Suender, Senior Vice President and General Counsel.*
24.1 Powers of Attorney. *
- ----------------------------------
* Previously filed.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than 20
II-2
<PAGE>
percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement; provided, however, that paragraphs (a)(1)(i)
and (a)(1)(ii) do not apply if the information required to be included
in a post-effective amendment by those clauses is contained in
periodic reports filed with or furnished to the Commission by the
Company pursuant to Section 13 or Section 15(d) of the Exchange Act
that are incorporated by reference in this Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Marlton, State of New Jersey, on February 15, 1999.
MEDQUIST INC.
By: *
-----------------------------
David A. Cohen
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on February 15,
1999 in the capacities indicated:
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C>
*
- -------------------------------- Chairman and Chief Executive Officer
David A. Cohen (principal executive officer)
/s/ John R. Emery
- -------------------------------- Senior Vice President, Treasurer and
John R. Emery Chief Financial Officer
(principal financial officer and principal
accounting officer)
*
- -------------------------------- President, Chief Operating Officer
John A. Donohoe, Jr. and Director
*
- -------------------------------- Director
James R. Emshoff
*
- -------------------------------- Director
William T. Carson
II-4
<PAGE>
<CAPTION>
<S> <C>
*
- -------------------------------- Director
Richard J. Censits
*
- -------------------------------- Director
John T. Casey
*
- -------------------------------- Director
A. Fred Ruttenberg
*
- -------------------------------- Director
John H. Underwood
*
- -------------------------------- Director
Terrence J. Mulligan
*
- -------------------------------- Director
R. Timothy Stack
*
- -------------------------------- Director
Edward L. Samek
*
- -------------------------------- Director
Bruce K. Anderson
*
- -------------------------------- Director
Richard H. Stowe
* By: /s/ John R. Emery
----------------------------
John R. Emery as Attorney-in-Fact
</TABLE>
II-5
EXHIBIT 23.1
CONSENT OF ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on MedQuist Inc.'s supplemental consolidated financial statements
included in this registration statement and to the incorporation by reference in
this registration statement of our report dated September 18, 1998 on the
restated consolidated financial statements included in Item 5 in MedQuist Inc.'s
Form 10-Q for the period ended September 30, 1998, and to all references to our
Firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, PA
February 12, 1999
EXHIBIT 23.2
CONSENT OF ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports (i) dated March 3, 1998
(except with respect to the matters discussed in Note 11, as to which the date
is September 18, 1998), on the consolidated financial statements of The MRC
Group, Inc. and Subsidiary included on pages F-27 through F-46 of the S-4
Registration Statement of MedQuist Inc. for the years ended December 31, 1995,
1996 and 1997 and (ii) dated May 1, 1998, on the financial statements of Medical
Records Corp. included on pages F-60 through F-66 of the S-4 Registration
Statement of MedQuist Inc. for the period ended July 19, 1996, all of which are
incorporated by reference in the Form 8-K of MedQuist Inc. dated December 15,
1998 and to all references to our Firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
Cleveland, Ohio,
February 12, 1999
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated February 16, 1996
(except with respect to the matters discussed in Note 2, as to which the date is
May 26, 1998) on the combined financial statements of Medical Records Corp. and
Affiliate included on pages F-53 through F-59 of the S-4 Registration Statement
of MedQuist Inc. for the year ended December 31, 1995, all of which are
incorporated by reference in the Form 8-K of MedQuist Inc. dated December 15,
1998, and to all references to our Firm included in this registration statement.
/s/ SKODA, MINOTTI, REEVES & CO.
Mayfield Village, Ohio,
February 12, 1999
