<PAGE>
As filed with the Securities and Exchange Commission on March 24, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
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
Identification No.)
incorporation or organization)
Five Greentree Centre, Suite 311, Marlton, NJ 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, NJ 08053
(609) 596-8877
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
With copies to:
James D. Epstein, Esq. Robert S. Risoleo, Esq.
Pepper Hamilton LLP Sullivan & Cromwell
3000 Two Logan Square 125 Broad Street
Philadelphia, PA 19103 New York, NY 10004
(215) 981-4000 (212) 558-4000
------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this 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. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box, and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Proposed
maximum maximum
Title of shares Amount to be aggregate price aggregate offering Amount of
to be registered registered per share (1) price (1) registration fee
<S> <C> <C> <C> <C>
Common Stock, no par value .. 4,830,000 shares $27.69 $133,742,700 $37,181
</TABLE>
- --------------------------------------------------------------------------------
(1) Calculated in accordance with Rule 457(c) based on the average of the high
and low sale prices of the common stock as reported on the Nasdaq National
Market on March 23, 1999.
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, as amended or until this Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
This information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an offer to sell
nor does it seek an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted. Subject to Completion. Dated March 24, 1999.
[GRAPHIC OMITTED]
4,193,467 Shares
MedQuist Inc.
Common Stock
--------------------
This prospectus relates to an offering of 4,193,467 shares of common stock
of MedQuist Inc. MedQuist is offering 1,000,000 of the shares to be sold in the
offering. The selling shareholders identified in the table on page 26 of this
prospectus are offering an additional 3,193,467 of the shares to be sold in the
offering. MedQuist will not receive any of the proceeds from the sale of the
shares sold by the selling shareholders.
The common stock is quoted on the Nasdaq National Market under the symbol
"MEDQ". On March 22, 1999, the last reported sale price for MedQuist's common
stock on the Nasdaq National Market was $30.06 per share.
See "Risk Factors" beginning on page 6 to read about certain factors you
should consider before buying shares of the common stock.
--------------------
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
--------------------
<TABLE>
<CAPTION>
Per Share Total
----------- ------
<S> <C> <C>
Initial public offering price ............................... $ $
Underwriting discount ....................................... $ $
Proceeds, before expenses, to MedQuist ...................... $ $
Proceeds, before expenses, to selling shareholders .......... $ $
</TABLE>
The underwriters may, under certain circustances, purchase up to an
additional 629,020 shares from MedQuist at the initial public offering price
less the underwriting discount.
--------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
Goldman, Sachs & Co.
BancBoston Robertson Stephens
Donaldson, Lufkin & Jenrette
Volpe Brown Whelan & Company
--------------------
Prospectus dated , 1999.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights information contained elsewhere in this
prospectus. Because this is a summary, it is not complete and does not contain
all of the information that you should consider before investing in the common
stock. You should read the entire prospectus carefully. Unless stated
otherwise, the information in this prospectus assumes no exercise of the
underwriters' option to purchase additional shares.
MedQuist
MedQuist is the leading national provider of medical transcription
services, a key component in the provision of healthcare services. Transcription
is the process by which dictation is converted into an electronic medical
report. The timely production of accurate reports is necessary for patient care
and for healthcare providers to receive reimbursement. Through our approximately
6,000 transcriptionists, proprietary software, sophisticated digital dictation
equipment and ability to interface with healthcare providers' computer systems,
we provide customized solutions to shorten our customers' billing cycles and
reduce their overhead and other administrative costs. We serve approximately
2,300 clients nationwide through our 77 client service centers.
As a result of internal growth and acquisitions, our revenue has
increased from $61.5 million in 1996 (before restatements for acquisitions
accounted for as pooling of interests) to $271.7 million in 1998. In December
1998, we acquired The MRC Group, Inc. adding approximately 500 clients and 2,400
experienced medical transcriptionists. MRC had revenue of approximately $108.0
million for the year ended December 31, 1997. Our experienced management team
and operating structure have enabled us to improve our operating margins. Our
growth has enabled us to take advantage of efficiencies such as a larger network
of transcriptionists and increased negotiating power with our vendors, including
telecommunication providers.
We believe that the demand for outsourced medical transcription services
will increase due to:
o continued consolidation among healthcare service providers;
o increased need for a diverse group of healthcare providers to
communicate and share medical data;
o increased importance of reducing overall healthcare costs; and
o increased focus of government agencies on detecting fraud and
abuse in the billing practices of healthcare providers.
Our objective is to maintain our position as the leading national
provider of medical transcription services and to enhance that position as the
information needs of healthcare providers continue to expand and evolve. Our
strategy contains five major initiatives. First, we will continue to focus on
increasing sales to our existing clients, including both medical records
departments and other departments of hospitals. Second, we will pursue new
clients, including additional hospital departments and non-hospital healthcare
companies. Third, we will continue to focus on improving the profitability of
our business by spreading the fixed portion of our overhead over a growing
revenue base. Fourth, we will pursue strategic relationships with companies that
provide new technologies or relationships that can enhance the services we
provide to our clients. Fifth, we will continue to pursue acquisitions that will
expand our client base, network of qualified transcriptionists and geographic
presence.
MedQuist was incorporated in New Jersey in 1984 and reorganized in 1987.
Our executive offices are located at Five Greentree Centre, Suite 311, Marlton,
New Jersey 08053 and our telephone number is (609) 596-8877.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by MedQuist ......................... 1,000,000 shares
Common stock offered by the selling shareholders ......... 3,193,467 shares
-----------------
Total shares offered ..................................... 4,193,467 shares
=================
Common stock outstanding after the offering .............. 34,727,120 shares
</TABLE>
Use of Proceeds........... MedQuist intends to use the net proceeds from the
offering for working capital and general corporate
purposes, including acquisitions.
MedQuist will not receive any proceeds from the
sale of common stock by the selling shareholders.
Risk Factors.............. An investment in the common stock involves
substantial risks. You should carefully read "Risk
Factors" beginning on page 6 before buying shares
of the common stock.
Nasdaq National
Market Symbol............ MEDQ
4
<PAGE>
Summary Financial Data
The following financial information is derived from MedQuist's audited
financial statements for the years ended December 31, 1996, 1997 and 1998
included in this prospectus, from its audited financial statements for the year
ended December 31, 1995, and from its unaudited financial statements for the
year ended December 31, 1994. The Company's financial statements have been
restated to reflect MedQuist's 1998 acquisitions accounted for as
pooling of interests. This information is only a summary and you should read it
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" beginning on page 12, MedQuist's financial statements
and related notes and other information that MedQuist has filed with the SEC.
See "Where You Can Find More Information" on page 31.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
(In thousands, except per share data)
1994 1995 1996 1997 1998
---------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ....................................... $59,228 $109,657 $152,109 $ 216,158 $271,655
Costs and expenses:
Cost of revenue .............................. 46,873 86,265 118,978 169,235 209,587
Selling, general and administrative .......... 6,184 9,144 11,908 14,362 16,061
Depreciation ................................. 2,581 5,752 7,372 10,339 12,697
Amortization of intangible assets ............ 264 896 3,150 5,652 3,757
Transaction costs and restructuring
charges ..................................... -- 347 644 2,075 18,221
------- -------- -------- --------- --------
Total operating expenses .................... 55,902 102,404 142,052 201,663 260,323
------- -------- -------- --------- --------
Operating income .............................. 3,326 7,253 10,057 14,495 11,332
Interest expense (income), net ................ 2,648 4,252 2,049 469 (325)
------- -------- -------- --------- --------
Income from continuing operations before
income taxes ................................. 678 3,001 8,008 14,026 11,657
Income tax provision (benefit) ................ (529) 640 2,720 5,293 8,472
------- -------- -------- --------- --------
Income from continuing operations ............. 1,207 2,361 5,288 8,733 3,185
Discontinued operations ....................... 1,612 (1,729) -- -- --
Extraordinary item ............................ -- (545) -- -- --
------- -------- -------- --------- --------
Net income .................................... 2,819 87 5,288 8,733 3,185
Inducement of warrant exercise ................ -- -- (707) -- --
------- -------- -------- --------- --------
Net income available to common
shareholders ................................. $ 2,819 $ 87 $ 4,581 $ 8,733 $ 3,185
======= ======== ======== ========= ========
Basic income per share:
Continuing operations ........................ $ 0.12 $ 0.23 $ 0.22 $ 0.28 $ 0.10
Discontinued operations ...................... 0.17 (0.17) -- -- --
Extraordinary item ........................... -- (0.05) -- -- --
Inducement of warrant exercise ............... -- -- (0.03) -- --
------- -------- -------- --------- --------
$ 0.29 $ 0.01 $ 0.19 $ 0.28 $ 0.10
======= ======== ======== ========= ========
Diluted income per share:
Continuing operations ........................ $ 0.12 $ 0.22 $ 0.20 $ 0.26 $ 0.09
Discontinued operations ...................... 0.17 (0.16) -- -- --
Extraordinary item ........................... -- (0.05) -- -- --
Inducement of warrant exercise ............... -- -- (0.03) -- --
------- -------- -------- --------- --------
$ 0.29 $ 0.01 $ 0.17 $ 0.26 $ 0.09
======= ======== ======== ========= ========
Balance Sheet Data:
As of December 31,
-----------------------------------------------------------------------
(In thousands)
1994 1995 1996 1997 1998
-------- -------- -------- --------- --------
Working capital ................................ $ 6,453 $ 13,142 $ 33,483 $ 36,608 $ 41,852
Total assets ................................... 85,811 91,191 158,551 173,773 187,311
Long-term debt, net of current portion ......... 39,577 23,342 9,964 7,589 215
Shareholders' equity ........................... 12,096 30,572 120,710 131,373 151,186
</TABLE>
5
<PAGE>
RISK FACTORS
An investment in the common stock involves many risks including market,
liquidity, credit, operational, legal and regulatory risks. These risks may be
substantial and are inherent in the business of MedQuist. You should consider
carefully the following information about these risks, together with the other
information in this prospectus, before buying shares of common stock.
If any of the following risks actually occur, our business and prospects
could be materially adversely affected, the trading price of our common stock
could decline, and you might lose all or part of your investment.
Our success depends upon our ability to recruit and retain qualified
transcriptionists
Our success depends, in part, upon our ability to attract and retain
qualified transcriptionists who can provide accurate transcription quickly.
Competition for skilled transcriptionists is intense. In addition, we require
that transcriptionists have substantial experience or receive substantial
training before being hired.
Our growth strategy includes acquisitions
As part of our growth strategy, we have made, and plan to continue to
make, acquisitions of other companies. A portion of our recent growth in
revenue is a result of acquisitions of other medical transcription companies.
The number of large acquisition candidates is decreasing. As a result, our
acquisition activities may not be as significant in the future and our growth
rate could decline.
In addition, if we are successful in pursuing acquisitions, we may need
to borrow money or incur other liabilities to finance our acquisition activity.
This could limit our financial flexibility. We may also be required to issue
additional shares of stock which could result in dilution to our shareholders.
<PAGE>
We depend on our senior management team
Our senior management team is crucial to our success. David A. Cohen,
our chief executive officer, and John A. Donohoe, our chief operating officer,
have 56 years of combined experience in the medical transcription industry.
New services or products using new technologies could adversely affect
the demand for our services
The introduction of competing services or products incorporating new
technologies, such as voice recognition capabilities or other alternative means
of data entry, could adversely affect the demand for our services. To maintain
our leadership position, we must improve our services to keep pace with
technological developments and changes in the marketplace.
We depend on a single line of business
We anticipate that we will continue to derive substantially all of our
revenue from providing medical transcription services. 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.
Our growth strategy includes the expansion of our customer base
Our core customer base has been the medical records departments of
hospitals. We plan to continue the recent expansion of our client base to
include additional outpatient clinics, physician practice groups and direct
patient care departments within hospitals. The success of our ongoing expansion
is important to our future because we expect an increase in the provision of
healthcare services at sites other than hospitals.
If we are not able to maintain our current rate of growth in revenue and
earnings, the market price of our common stock could decline
Our revenue and profits have grown in recent periods as a result of both
internal growth and acquisitions. The rate of growth in revenue and profits may
decline as a result of a variety of factors, including:
o our ability to hire and retain transcriptionists;
o size and timing of acquisitions;
o integration of acquired businesses into our operations;
o changes in demand for our services; and
o competitive conditions in the industry.
6
<PAGE>
It is possible that our future operating results may be below the
expectations of stock market analysts and investors. Any shortfall could cause
a decline in the price of our common stock.
In addition, a decline in the price of our common stock could make it
more difficult or expensive for us to acquire companies by issuing common
stock.
The market price of our common stock
may be volatile
The market price of our common stock has been volatile in the past and
may be volatile in the future. 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 product or service introductions by
us or our competitors;
o government regulations;
o healthcare legislation and reforms; and
o general market and economic conditions.
The stock market in recent years has experienced substantial price and
volume fluctuations. This has been accompanied by extreme volatility in the
stock prices of healthcare service companies that often has been unrelated to
the operating performance of these companies. Similar market activity could
adversely affect the market price of our common stock in the future.
We compete with many others in the market for medical transcription services
We compete with approximately 1,500 medical transcription service
companies in the United States. These companies offer services that are similar
to ours and compete with us for both clients and qualified transcriptionists.
We also compete with the in-house transcription staffs of our current and
potential clients. Increased competition may result in lower prices for our
services, higher payroll costs, reduced operating margins and the inability to
increase our market share.
Although many of our competitors are small local or regional companies,
several of our competitors are large national companies. These companies
include Transcend Services, Inc., Rodeer Systems, Inc., and Lanier
Transcription Services, 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. Current
and potential competitors may have financial, technical and marketing resources
that are greater than ours. As a result, competitors may be able to respond
more quickly to evolving technological developments or changing customer needs
or devote greater resources to the development, promotion or sale of their
services than we can.
<PAGE>
In addition, competition may increase due to consolidation of
transcription companies. Current and potential competitors may establish
cooperative relationships with third parties to increase their ability to
attract our current and prospective clients.
A change in law or a challenge to our classification of our at-home
transcriptionists may result in additional employment costs, taxes or penalties
All at-home transcriptionists hired by MedQuist and the At-home
transcriptionists who came to work for MedQuist as a result of our acquisition
of MRC and all at-home transcriptionists hired by our MedQuist MRC subsidiary
are treated as employees for state tax, benefits, unemployment, federal income
tax and social security tax purposes. Other at-home transcriptionists hired by
MedQuist are treated as independent contractors for state tax, benefits and
unemployment purposes and as statutory employees for federal income tax and
social security tax purposes. If there is a change in law or a successful
challenge to our position regarding treatment of at-home transcriptionists as
independent contractors, we may have to pay or incur additional employment
costs, taxes and penalties.
Competitors and software providers may
claim that we are infringing on their
proprietary rights
Defending these claims, even if they have no merit, can be
time-consuming and expensive. In addition, in the event of infringement claims,
we may be required to enter into royalty or licensing agreements or cease the
claimed infringing activities.
7
<PAGE>
We may be subject to liability if we fail to comply with confidentiality
requirements
We are subject to many laws, regulations and contractual provisions that
require us to keep the medical information that we transcribe confidential. We
may be subject to liability if we fail to comply with confidentiality
requirements.
Our customers and suppliers may not be Year 2000 compliant
We rely heavily on the computer systems of our customers, suppliers and
other organizations such as telephone companies in operating our business. If
these systems are not Year 2000 compliant, our business, operating results and
financial position could be materially and adversely affected.
Significant number of shares eligible for future sale could lower the market
price for our common stock
Sales of large numbers of shares of common stock after the offering, or
even the potential of those sales, would likely lower the market price of our
common stock. After the offering, we will have 34,727,120 shares of common stock
outstanding, substantially all of which will be freely tradeable. In addition,
4,433,000 shares which may be issued upon the exercise of outstanding options
may be sold at various times after the offering.
Anti-takeover provisions may make it more difficult for a third party to
acquire control of us and could reduce the amount that shareholders would
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 MedQuist, even if that change in control would be beneficial to
shareholders. These provisions could reduce the amount that shareholders would
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 that 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 three year term.
o We have entered into severance arrangements with most of our senior
management which provide for significant payments upon a change in
control.
o All outstanding options to purchase our stock would become exercisable
immediately upon a change in control.
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act. These statements include forward-looking
language such as "will likely result," "may," "are expected to," "is
anticipated," "estimated," "projected," "intends to" or other similar words. Our
actual results are likely to differ, and could differ materially, from the
results expressed in, or implied by, these forward-looking statements. There are
many factors that could cause these forward-looking statements to be incorrect,
including but not limited to the risks described above under "Risk Factors".
When considering these forward-looking statements, you should keep in mind these
risk factors and the other cautionary statements in this prospectus, and should
recognize that those forward-looking statements speak only as of the date made.
Neither MedQuist nor the underwriters undertakes any obligation to update any
forward-looking statement included in this prospectus.
8
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of shares of common stock
in this offering will be approximately $28,787,000 million (approximately
$46,939,000 million if the underwriters exercise their option to purchase
additional shares in full), after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us. This estimate assumes
an initial public offering price of $30.06 per share, which is the last reported
sales price for the common stock on the Nasdaq National Market on March 22,
1999. We will not receive any proceeds from the sale of common stock by the
selling shareholders.
We currently intend to use the net proceeds of this offering for working
capital and general corporate purposes, including possible acquisitions of
businesses and assets that are complementary to ours. Although we have no
current agreements to make any significant acquisitions, we regularly pursue
acquisition opportunities and engage in negotiations.
Pending such uses, we expect to invest the net proceeds from this
offering in government securities and other short-term, investment-grade,
interest-bearing instruments.
9
<PAGE>
MARKET FOR THE COMMON STOCK AND DIVIDEND POLICY
The common stock is traded on the Nasdaq National Market under the
symbol "MEDQ". The following table sets forth the high and low reported prices
for the Common Stock for the last two fiscal years and for the first quarter of
1999. The bid quotations for the Nasdaq National Market reflect inter-dealer
prices, do not include retail mark-ups, mark-downs or commissions and may not
necessarily reflect actual transactions.
High Low
---------- ----------
1997
First Quarter ............................ $ 9.33 $ 7.17
Second Quarter ........................... 10.42 6.33
Third Quarter ............................ 12.00 9.33
Fourth Quarter ........................... 17.56 10.81
1998
First Quarter ............................ $ 19.56 $ 15.00
Second Quarter ........................... 29.38 17.63
Third Quarter ............................ 33.00 20.50
Fourth Quarter ........................... 40.00 21.75
1999
First Quarter (through March 22) ......... $ 39.00 $ 29.25
The above noted bid quotations reflect a three for two stock split
effected on September 9, 1997 and a two for one stock split effected on June
15, 1998.
On March 22, 1999 the closing sale price for the Common Stock, as
reported on the Nasdaq National Market, was $30.06 per share.
We have never declared or paid any cash dividends on our capital stock.
We expect to retain any future earnings to fund operations and the continued
development of our business and, therefore, do not anticipate paying any cash
dividends in the foreseeable future. In addition, our agreements with our
senior lender restrict the payment of dividends.
10
<PAGE>
CAPITALIZATION
The table below sets forth our capitalization as of December 31, 1998 on
an actual basis and as adjusted to reflect our sale of 1,000,000 shares of
common stock in the offering at an assumed public offering price of $30.06
per share (the last reported sale price on the Nasdaq National Market on March
22, 1999), after deducting underwriting discounts and commissions and estimated
offering expenses payable by us. This table should be read in conjunction with
our consolidated financial statements and the other financial information
included in this prospectus.
<TABLE>
<CAPTION>
As of December 31, 1998
---------------------------
Actual As Adjusted
------------ ------------
(In thousands, except share
data)
<S> <C> <C>
Long-term debt, excluding current portion ............................. $ 215 $ 215
-------- -------
Shareholders' equity:
Common stock, no par value, 60,000,000 shares authorized,
33,258,000 shares issued and outstanding (actual), and
34,258,000 shares issued and outstanding (as adjusted) (1) ......... -- --
Additional paid-in capital ........................................... 136,603 165,390
Retained earnings .................................................... 14,536 14,536
Unrealized gain on marketable securities ............................. 585 585
Deferred compensation ................................................ (538) (538)
-------- --------
Total shareholder's equity ......................................... 151,186 179,973
--------
Total capitalization .............................................. $151,401 $180,188
======== ========
</TABLE>
- ------------
(1) Excludes approximately 4,433,000 shares of common stock which may be issued
upon exercise of options outstanding as of December 31, 1998, and an
additional 273,000 shares of common stock reserved for issuance upon
exercise of options that may be granted in the future. As of December 31,
1998, the weighted average exercise price of all outstanding options was
approximately $12.00 per share.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYISIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are the leading national provider of medical transcription services.
Our fees are based primarily on contracted rates with our customers. We
recognize revenue when we render services and deliver reports to our customers.
Cost of revenue consists of all direct costs associated with providing
transcription related services, including payroll, telecommunications, repairs
and maintenance, rent and other direct costs. Most of our cost of revenue is
variable. Selling, general and administrative expenses include costs associated
with our senior executive management, marketing, accounting, legal and other
administrative functions. Selling, general and administrative expenses are
mostly fixed, but include certain variable components.
From 1995 through 1998, we completed 18 acquisitions. Five acquisitions
completed in 1998, including the acquisition of MRC, were accounted for as
pooling of interests. Four of these acquisitions were material and,
accordingly, we restated our financial statements.
On December 10, 1998, MedQuist acquired MRC through the issuance of
approximately 8.61 million shares of the Company's common stock. We believe that
the MRC acquisition will better enable us to better utilize crucial resources
and reduce corporate overhead by combining accounting, legal and human
resources. Further, the additional transcriptionists should permit a more
efficient workflow and faster customer service. In 1997, MRC's revenue and
operating income, before its restructuring charge, were $108.0 million and $1.2
million, or 1.1% of its revenue. MedQuist's operating income, before restating
for its pooling of interests acquisitions, was 14.1% of revenue in 1997. We
believe that, over time, the operating margins of the combined company will
continue to improve and achieve levels comparable to MedQuist's historical
performance as a stand-alone company.
Results of Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of revenue, as restated for our acquisitions
accounted for as a pooling of interests:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenue .............................................. 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenue ..................................... 78.2 78.3 77.2
Selling, general and administrative ................. 7.8 6.6 5.9
Depreciation ........................................ 4.9 4.8 4.7
Amortization of intangible assets ................... 2.1 2.6 1.4
Transaction costs and restructuring charges ......... 0.4 1.0 6.7
------ ------ ------
Operating income ..................................... 6.6 6.7 4.1
Interest income (expense), net ....................... ( 1.4) ( 0.2) 0.1
------ ------ ------
Income before income taxes ........................... 5.2 6.5 4.2
Income tax provision ................................. 1.8 2.5 3.1
------ ------ ------
Net income ........................................... 3.4% 4.0% 1.1%
====== ====== ======
</TABLE>
---------------------------------
Year Ended December 31, 1998 Compared to
Year Ended December 31, 1997
Revenue. Revenue increased 25.7% from $216.2 million in 1997 to $271.7
million in 1998. The $55.5 million increase as compared to 1997 was composed of
$43.5 million from internally generated growth and $12.0 million from
acquisitions accounted for as purchase transactions.
Cost of Revenue. Cost of revenue increased 23.9% from $169.2 million in
1997 to $209.6 million in 1998 and was directly related to the increase in
revenue. As a percentage of revenue, cost of revenue decreased from 78.3% in
1997 to 77.2% in 1998 due primarily to the improved direct margins of MRC's
business in 1998 versus 1997.
12
<PAGE>
Selling, General and Administrative. Selling, general and
administrative expenses increased 11.8% from $14.4 million in 1997 to $16.1
million in 1998. The increase was due primarily to increased administrative
costs to support the increase in revenue, in addition to increased technology
development costs. This increase was partially offset by decreased marketing
costs at MRC. As a percentage of revenue, selling, general and administrative
expenses decreased from 6.6% in 1997 to 5.9% in 1998. The percentage decrease
was due primarily to our ability to spread the fixed portion of our overhead
over a larger revenue base.
Depreciation. Depreciation increased 23.3% from $10.3 million in 1997 to
$12.7 million in 1998. The increase in depreciation was a result of increased
capital expenditures to support the growth in revenue. As a percentage of
revenue, depreciation remained relatively constant at 4.7% in 1998 compared to
4.8% in 1997.
Amortization. Amortization of intangible assets was $5.7 million in 1997
compared to $3.8 million in 1998. The amount in 1997 includes amortization of
noncompete agreements from prior business acquisitions that were fully
amortized in late 1997.
Interest. We had interest expense of $469,000 in 1997 and interest
income of $325,000 in 1998. We repaid a significant portion of our debt in 1997
and invested our excess cash in 1998.
Transaction Costs and Restructuring Charges. In 1998, we (1) incurred
$11.0 million of transaction costs associated with pooling of interests
business combinations, (2) incurred $682,000 of transaction costs related to
MRC's terminated initial public offering and (3) recorded a $6.5 million
restructuring charge associated with the MRC acquisition.
As of December 31, 1998, $10.5 million of transaction costs associated
with the pooling of interests acquisitions had been paid, with $500,000 included
in accrued expenses for payments scheduled to be made in 1999.
In June 1998, MRC filed a registration statement for an initial public
offering that was terminated in September 1998 upon signing the merger
agreement with the Company. All transaction costs related to MRC's terminated
initial public offering were paid in 1998.
In December 1998, our board of directors approved a restructuring plan
associated with the MRC acquisition. When the board approved the plan, we
recorded a $6.5 million charge, of which $3.8 million related to non-cancelable
lease obligations on duplicate facilities, $1.6 million related to employee
severance and $1.1 million related to contract cancellations and other exit
costs. We expect to complete the restructuring in 1999. As of December 31,
1998, $567,000 of the employee severance and $410,000 in other restructuring
costs had been paid. At December 31, 1998, $5.6 million was included in accrued
expenses related to the restructuring.
In 1997, MRC incurred a restructuring charge of $2.1 million related to
the closure and consolidation of less profitable or redundant client service
centers and other non-recurring acquisition and integration costs incurred in
connection with MRC's acquisition of Medical Records Corp. As of December 31,
1998, $1.2 million related to closed facility leases remained in accrued
expenses.
Year Ended December 31, 1997 Compared to
Year Ended December 31, 1996
Revenue. Revenue increased 42.1% from $152.1 million in 1996 to $216.2
million in 1997. The $64.1 million increase as compared to 1996 was composed of
$53.1 million from internally generated growth and $11.0 million from
acquisitions accounted for as purchase transactions.
Cost of Revenue. Cost of revenue increased 42.2% from $119.0 million in
1996 to $169.2 million in 1997. This increase was directly related to the
increase in revenue. As a percentage of revenue, cost of revenue remained
relatively constant at 78.2% in 1996 as compared to 78.3% in 1997.
Selling, General and Administrative. Selling, general and
administrative expenses increased 21.0% from $11.9 million in 1996 to $14.4
million in 1997. The increase was due primarily to increased administrative
costs to support the increase in revenue, in addition to increased marketing
costs and technology development costs incurred by MRC. As a percentage of
revenue, selling, general and administrative expenses decreased from 7.8% in
1996 to 6.6% in 1997. The percentage decrease was due primarily to our ability
to spread the fixed portion of our overhead over a larger revenue
base.
13
<PAGE>
Depreciation. Depreciation increased 39.2% from $7.4 million in 1996 to
$10.3 million in 1997. The increase in depreciation was a result of capital
expenditures made to support the growth in revenue. As a percentage of revenue,
depreciation remained relatively constant at 4.8% in 1997 compared to 4.9% in
1996.
Amortization. Amortization of intangible assets was $5.7 million in 1997
as compared to $3.2 million in 1996. The increase in 1997 was attributable to
the acquisitions made in 1996 and 1997 accounted for as purchase transactions.
Interest. Interest expense decreased from $2.0 million in 1996 to
$469,000 in 1997. The decrease in 1997 was primarily related to the payment of
our senior term loans, reduced borrowings under our revolving credit facility
and the payment of the cash portion of the deferred purchase price on May 30,
1996 for our 1994 acquisition of Transcriptions, Ltd. This deferred purchase
price was paid using a portion of the proceeds from our 1996 common stock
offering. In 1996 we recorded $640,000 of non-cash imputed interest expense
associated with the Transcriptions, Ltd. deferred purchase price.
Restructuring Charges. MRC incurred restructuring charges of $2.1 million
in 1997 and $644,000 in 1996. These charges were related to the closure and
consolidation of less profitable or redundant facilities. In addition, the 1997
restructuring charge included other acquisition and integration costs incurred
in connection with MRC's acquisition of Medical Records Corp.
Liquidity and Capital Resources
At December 31, 1998, we had working capital of $41.9 million, including
$15.9 million of cash and cash equivalents, and no outstanding bank debt. During
1998, our operating activities provided cash of $22.9 million and during 1997,
our operating activities provided cash of $ 21.4 million. Our cash flow from
operating activities is generated primarily from our net income before
depreciation and amortization, partially offset by increases in accounts
receivable. In 1998, the increase in operating cash flow was also affected by
increased accrued expenses, primarily related to the restructuring charge.
During 1998, we used cash for investing activities of $15.9 million,
consisting primarily of $14.0 million of capital expenditures. In addition, we
generated $4.0 million in cash from sales of short-term investments and used
$4.4 million for the acquisition of three transcription businesses accounted
for under the purchase method. In addition, we paid $1.4 millon to a dissenting
shareholder in connection with the Signal acquisition. During 1997, we used
cash for investing activities of $18.4 million, consisting primarily of $13.7
million of capital expenditures. In addition, in 1997 we generated $1.0 million
in cash from sales of short-term investments and used $5.6 million for the
acquisition of eight transcription businesses accounted for under the purchase
method.
During 1998, cash used in financing activities was $5.5 million,
consisting primarily of $10.0 million of debt repayments and $1.0 million of
distributions to former stockholders of acquired S-corporations, offset by $5.5
million in proceeds from the issuance of common stock, including option and
warrant exercises and sales in connection with employee benefit plans. During
1997, cash used in financing activities was $3.5 million, consisting primarily
of $3.8 million of debt repayments, and $1.1 million of shareholder
distributions to former stockholders of acquired S-corporations, and $676,000 to
purchase and retire common stock, offset by $2.0 million in proceeds from the
issuance of common stock, including option and warrant exercises and sales in
connection with employee benefit plans.
We have a borrowing facility with Chase Manhattan Bank. The Chase
facility provides for a $10.0 million senior unsecured revolving credit
facility expiring April 23, 2000. The Chase facility bears interest at
resetting rates selected by the Company from various alternatives. The interest
rate alternatives are either (1) the greater of (a) prime rate, (b) the federal
funds rate plus 0.5%, and (c) the bank's certificate of deposit rate plus 1%,
or (2) LIBOR plus 0.75%. The Chase facility also allows us 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 Chase facility and amortized over five-year periods (20
consecutive quarters). Each acquisition term loan that is created would
permanently reduce the remaining Chase facility commitment by a like amount.
We can use the Chase facility for working capital and general corporate
purposes. If any amounts under the Chase facility are repaid, other
14
<PAGE>
than acquisition term loans, we may reborrow such amounts. The Chase facility
includes financial and other covenants applicable to us, including limitations
on capital expenditures and dividends. As of March 22, we had no outstanding
borrowings under the Chase facility.
We believe that cash flow generated from operations and borrowing
capacity under the Chase facility will be sufficient to meet our current
working capital and capital expenditure requirements. We expect capital
expenditure requirements to be consistent with prior years as a percentage of
revenue in 1999.
Year 2000 Compliance
We are aware of the issues associated with the programming code in
existing computer systems as 2000 approaches. The Year 2000 problem is
pervasive and complex as virtually every computer operation will be affected in
some way by the rollover of the two digit year value to 00. The issue is
whether computer systems will recognize date sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. We rely on our systems
in operating and monitoring all aspects of our business. We also rely on the
external systems of our customers, suppliers, telecommunication carriers,
utilities and other organizations with which we do business.
We have approached the Year 2000 problem in the following manner:
o assessing, correcting and testing our internal systems;
o obtaining assurance or information on the state of Year 2000 readiness
of our material clients and suppliers; and
o developing contingency plans, when practical, to address expected Year
2000 failures.
<PAGE>
A discussion of each of these areas follows.
Internal Systems. In 1998, we conducted an assessment of our internal
systems. This assessment covered embedded computer chips, computer software,
computer hardware, telephones, communications equipment, facsimile equipment,
scanners, copiers and voice recording systems which we own and were able to
identify as critical to our ability to provide services to our clients. The
assessment identified a variety of software and hardware issues that we needed
to address to be prepared for 2000. Some of these issues include the need to:
o upgrade or modify the BIOS (programs which allow personal computers to
run) on some of our PCs (or replace the PC);
o modify some of our server operating systems;
o reset the dates or modify some of our voice capture systems;
o modify the date fields of some of our interfaces;
o upgrade the version level of the transcription software of some of our
users and clients;
o accelerate the conversion of some clients from outdated software
applications to compliant software applications; and
o upgrade some of the financial systems.
June 30, 1999 is our internal target for rectifying Year 2000 issues for
all mission critical applications. From July 1 to December 31, 1999, we plan to
retest critical systems and evaluate non-critical applications for potential
Year 2000 compliance issues.
Clients and Suppliers. We also have exposure to Year 2000 problems that
may be experienced by others. These risks include the inability to exchange
electronic data and the risk of disruptions and failures of persons with whom
we do business or on whom we or our clients rely. Our business interacts with
or depends on the systems of clients, suppliers, telecommunication carriers,
utilities, vendors, financial institutions and others. If we are not able to
exchange information electronically with our clients and transcriptionists our
business may be materially impacted. For example, our business relies heavily
on telephone services. If phone service is lost, we will be unable to provide
services until phone service is restored or contingency plans can be put in
place.
If our clients, suppliers, vendors and financial institutions are not
Year 2000 compliant, there may be a material disruption to their businesses.
These disruptions could negatively impact us in many ways, including:
o a client may be unable to pay us;
15
<PAGE>
o a financial institution may be unable to process checks drawn on our
bank accounts, accept deposits or process wire transfers;
o vendor deliveries of computer equipment and other supplies may be
delayed or cease;
o voice and data connections we use to share information may be
interrupted; and
o brokers who make a market in our stock may not be able to trade our
stock.
This list is not comprehensive. Other interruptions to our normal
business activities may occur, the nature and extent of which we cannot
foresee. In an effort to minimize the exposure to such third party Year 2000
problems, we have initiated a process of obtaining written assurances from
these third parties that they will be Year 2000 compliant. Based on the
response we receive from the third parties, we are identifying the associated
risks to our business and making necessary changes.
Contingency Plans. We are developing Year 2000 contingency plans where
practical. These plans address alternatives to electronic processing of medical
information, payroll, vendor payments, cash receipts from clients and
communicating without e-mail. These plans include identifying alternative
sources of goods and services and performing certain tasks manually. For
example, these contingency plans include requiring physicians to dictate into
hand held devices, delivering tapes from these devices to transcriptionists
and printing paper copies of reports to be delivered to clients.
In some situations, however, it is impractical to have an effective
contingency plan. For example, a failure of our primary banking institution may
interrupt our cash receipts and our ability to pay our employees and vendors in
a timely manner. Our contingency plan may call for paying employees in cash,
but may not be practical due to the amount of cash involved, the number of
locations and the number of individuals to be paid. The number of Year 2000
failures we suffer may exceed our ability to address them all at one time. In
addition, significant Year 2000 failures by third parties, including clients,
may jeopardize our financial strength. In severe circumstances, our ability to
continue as a going concern may be threatened or we may fail. We believe,
however, that we are taking reasonable and prudent steps to address the Year
2000 problem based on information currently available to us. We will continue
to monitor this issue and plan to modify our approach if we believe the
circumstances warrant such a change.
Based on the information available to date, we expect to incur
approximately $200,000 in expense to correct operational problems such as BIOS
fixes. We also believe we will incur approximately $1.2 million to replace and
upgrade voice capture systems, which will be capitalized and depreciated over
their estimated useful lives of five years.
Quantitative And Qualitative
Disclosure About Market Risk
We generally do not use derivative financial instruments in our
investment portfolio. We make investments in instruments that meet credit
quality standards, as specified in our investment policy guidelines; the policy
also limits the amount of credit exposure to any one issue, and type of
instrument. We do not expect any material loss with respect to our investment
portfolio.
The following table provides information about our investment portfolio
at December 31, 1998. For investment securities, the table presents principal
amounts and related weighted average interest rates (dollars in thousands).
Cash and cash equivalents ......... $15,936
Average interest rate ............ 4.0%
Warrant investment ................ $ 900
Average interest rate ............ --
Total portfolio ................... $16,836
Weighted average interest rate ... 3.8%
The majority of our debt obligations were repaid in February 1999.
Remaining obligations consist primarily of relatively insignificant capital
lease obligations that mature through 2002.
Inflation
We believe that the effects of inflation and changing prices generally
do not have a material adverse effect on our results of operations or financial
condition.
16
<PAGE>
BUSINESS
MedQuist is the leading national provider of medical transcription
services, a key component in the provision of healthcare services. Transcription
is the process by which dictation is converted into an electronic medical
report. The timely production of accurate reports is necessary for patient care
and for healthcare providers to receive reimbursement. Through our approximately
6,000 transcriptionists, proprietary software, sophisticated digital dictation
equipment and ability to interface with healthcare providers' computer systems,
we provide customized solutions to shorten our customers' billing cycles and
reduce their overhead and other administrative costs. We serve approximately
2,300 clients nationwide through our 77 client service centers.
As a result of internal growth and acquisitions, our revenue has
increased from $61.5 million in 1996 (before restatements for acquisitions
accounted for as pooling of interests) to $271.7 million in 1998. Our
experienced management team and operating structure have enabled us to improve
our operating margins. Our growth has enabled us to take advantage of
efficiencies such as a larger network of transcriptionists and increased
negotiating power with our vendors, including telecommunication providers.
Recent Developments
On December 10, 1998, MedQuist acquired The MRC Group, Inc. in a
pooling of interests transaction issuing approximately 8.61 million shares of
common stock. MRC, now a subsidiary of MedQuist, serves approximately 500
clients and employs approximately 2,400 experienced medical transcriptionists.
For the year ended December 31, 1997, MRC had revenue of approximately $108.0
million.
We believe that the MRC acquisition will enable us to better utilize key
resources. In addition to the reduction of corporate overhead costs by combining
accounting, legal and human resources, the addition of transcriptionists will
permit a more efficient workflow and faster customer service. In 1997, MRC's
operating income, before its restructuring charge, was 1.1% of total revenue
while MedQuist's operating income, before restating for the pooling of interests
acquisitions, was 14.1% of total revenue. We believe that, over time, the
operating margins of the combined company will continue to improve and achieve
levels comparable to MedQuist's historical performance as a stand-alone company.
History
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
healthcare provider. In May 1994, we acquired our first medical transcription
business, Transcriptions, Ltd. By the end of 1995, we had divested all of our
non-medical transcription businesses, and through December 31, 1998, we had
acquired MRC and 17 other medical transcription companies.
Industry Overview
Medical transcription is the process by which free-form dictated patient
information is recorded and converted into a useable format, electronically
routed to the appropriate location and added to a patient's medical record.
Physicians and other healthcare providers use this information for delivery of
patient care. Administrative personnel use the information for billing and
other administrative purposes. Accurate and prompt transcribed records are
required for reimbursement and to avoid healthcare fraud and abuse penalties.
We expect that, as the percentage of medical records that are stored
electronically continues to grow, the information management uses for such
records will increase.
The majority of dictated reports are generated within the medical
records departments of hospitals. Historically, transcription services were
performed by hospital employees and were costly and difficult to manage.
Examples of these reports include patient histories, discharge summaries,
operative reports and consultation reports. Increasingly, other hospital
departments, such as radiology, emergency, oncology, pediatrics and cardiology,
are dictating reports to improve delivery of care and administrative functions.
Health maintenance organizations, out-patient clinics and physician practice
groups are also expanding their use of transcribed medical reports.
17
<PAGE>
We believe the market for outsourced transcription services will expand
due in part to the following trends:
Consolidation. As healthcare providers consolidate and increase in size,
their information management needs become more complex and they increasingly
require larger and more sophisticated vendors.
Connectivity. The exchange of patient information and the delivery of
patient care must be coordinated among many entities, including physicians,
hospitals and managed care companies. Increasingly, healthcare organizations
are centralizing patient data into an accessible system creating economies of
scale to reduce overall healthcare costs and to improve the efficient delivery
of patient care. Accurate medical transcription and distribution and storage of
transcribed records are critical to such coordination.
Cost Containment. Outsourcing services in the healthcare industry
continues to increase as a means to reduce administrative burdens and fixed
costs. Hospitals and other healthcare organizations increasingly are
outsourcing their electronic transcription of dictated patient records as their
information needs and volume of dictated reports expand. Outsourcing
transcription services permits providers:
o to reduce overhead and other administrative costs;
o to improve the quality of reports;
o to access leading technologies without development and investment
risk; and
o to obtain the expertise to implement and manage a system tailored to
the providers' specific requirements.
Compliance. Government agencies are increasingly focused on fraud and
abuse in the healthcare industry. For example, under Medicare, providers must
submit detailed documentation in order to receive reimbursement. In many
instances, providers have been fined and penalized for failing to substantiate
claims for reimbursement in an audit. As a result, Medicare, the insurance
industry and, in some cases healthcare accreditation organizations, are
requiring transcribed reports:
o to support claims for reimbursement;
o to facilitate communication between various parts of a healthcare
network;
o to improve the quality and efficiency of patient care; and
o to retain and provide reliable information in the event of malpractice
litigation.
<PAGE>
Strategy
Our objective is to maintain our position as the leading national
provider of medical transcription services and to enhance that position as the
information needs of healthcare providers continue to expand and evolve.
The key elements of our strategy include the following:
Expand Existing Client Relationships. We provide most of our
transcription services to hospital medical records departments. We seek to
increase our share of transcription services through our close and continuing
client relationships as these departments outsource more of their transcription
requirements and as the volume of patient records continues to grow. In
addition, we will continue to penetrate the direct care departments at
hospitals such as radiology, emergency, oncology, pathology, pediatrics and
cardiology, within our existing client base. Historically, these departments
have not dictated their patient data or outsourced the transcription of their
patient data to the same extent as medical records departments.
Extend Current Client Base. We will continue to extend our base of
traditional hospital clients and to pursue additional clients such as health
maintenance organizations, out-patient clinics and physician practice groups
which we believe will represent a growing percentage of the available market.
Based upon input from new clients, we believe that references from our existing
client base represent a key component of our sales and marketing efforts.
Capitalize on Operating Expertise. Our experienced management team and
our operating structure have enabled us to consistently improve our operating
margins by spreading the fixed portion of our overhead over a growing revenue
base. We will focus on continuing to grow our revenue to take advantage of
efficiencies such as
18
<PAGE>
a larger network of transcriptionists and increased negotiating power with our
vendors, including telecommunication providers.
Pursue Strategic Relationships. We have initiated relationships with
developers and end-users of emerging technologies to create enhanced services
for our clients. We will continue to incorporate advances in technology to
improve the efficiency of our operations, reduce our costs, expand the breadth
and functionality of our services and enhance our competitive position.
Pursue Strategic Acquisitions. The medical transcription industry is
highly fragmented with approximately 1,500 providers of outsourced medical
transcription services. Most of these are small companies that lack the
financial resources or the technological capabilities necessary to provide
transcription services nationwide. We will continue to pursue acquisitions that
will expand our client base, network of qualified transcriptionists and
geographic presence.
MedQuist Services
Through our approximately 6,000 transcriptionists, proprietary software,
sophisticated digital dictation equipment and ability to interface with
healthcare providers' computer systems, we provide customized solutions to
shorten our customers' billing cycles and reduce their overhead and other
administrative costs. In addition to hospital medical records departments, our
target markets include patient care departments, such as radiology, emergency
rooms, oncology, pathology, pediatrics and cardiology departments, health
maintenance organizations, physician practice groups and out-patient clinics.
We record and store free-form medical dictation, transcribe the dictation
into reports, and electronically receive, review and distribute final reports to
a client. Authorized individuals at multiple locations can access this
electronic information when needed for administrative, billing and patient care
purposes.
We have designed our system to enable clients and individual healthcare
providers to review the status of particular patient data and transcribed
reports at any point in time and to advise us whether the production of a
particular report requires acceleration. In addition, our system permits us to
monitor our on-time performance, especially with respect to critical reports
requiring turnaround times of less than 24 hours.
Typical Medical Transcription Process
(1) A physician identifies himself and dictates the required patient reports
using any telephone.
(2) The dictation is recorded on a digital dictation system located in a
MedQuist client service center.
(3) The transcriptionist, working at home, accesses the dictated voice file.
The transcriptionist uses our proprietary software to verify, match and
import patient demographic information.
(4) The transcriptionist transcribes the dictation.
(5) Finished transcription text files are transferred electronically to the
client service center.
(6) Our software categorizes and records the details of the transcribed
document for use by our automatic payroll and billing systems.
(7) The transcription is subject to our quality assurance program.
(8) The work is automatically verified against patient demographic information
and transferred to the client's system using a variety of interfaces.
(9) The transcribed report is electronically transferred to the physician for
review and signature.
(10) Copies of the report may be distributed across the provider's network. The
work can be transmitted to out-patient clinics or is available for view
using browser-based technology.
19
<PAGE>
We serve approximately 2,300 clients through 77 client service centers
nationwide. Each client service center is run by a manager who is supported by
three additional levels of operating management. Due to the large number of
trained transcriptionists and our ability to allocate work among them
efficiently, we believe that we are able to reduce the production turnaround
times for transcribed medical reports. An in-house staff or small transcription
company generally cannot achieve these efficiencies to the extent that we can.
Our system provides editing and electronic review capabilities, such as specific
reference to pages or clauses to alert clients to potential deficiencies, that
increase accuracy and reliability.
Our system provides flexibility to address individual client needs. We
are capable of modifying the system to interface with existing client systems.
Our technical staff works closely with our clients, both before and after
installation, to develop system modifications and refinements.
Medical Transcriptionist Recruitment
One of the most significant challenges to our continued growth is the
successful recruitment and retention of qualified transcriptionists. To address
this challenge, we have enhanced our recruitment process, increased training
and formed strategic relationships with various schools across the country.
We have hired a Director of National Recruitment and at least two
recruiters in each of our three regional groups. In addition, each client
service center has at least one person designated to monitor and manage
recruitment efforts.
Currently, we are experimenting with software that monitors
transcriptionist quality and should allow us to implement an accelerated
training program so that less experienced transcriptionists can be hired and
trained efficiently. In addition, we have established a "Partners in Education"
program with adult education programs, vocational technology schools, and
colleges offering medical transcription training programs.
Sales and Marketing Efforts
Our existing client base is a key component of our marketing and sales
strategy. Based on input from new clients, we believe that new clients have
utilized our services in large part due to recommendations and references by
our existing national client base. All office managers and operational vice
presidents, as well as our senior management, including Mr. Cohen, have sales
responsibilities.
<PAGE>
We utilize a consultative sales and marketing approach by establishing a
working relationship with our clients through a series of direct meetings with
the chief financial officer, health information manager, chief information
officer and other key individuals at the client's organization. In this manner,
we obtain information concerning the particular needs of a client and educate
the client as to how our services can be customized to meet those needs. As
part of our marketing efforts, we also advertise in national healthcare trade
publications (including those sponsored by the American Health Information
Management Association) and participate in industry conventions.
Business Partners and Relationships
We are always evaluating emerging technologies and apply them as
appropriate to make our services more reliable, efficient and cost-effective,
and to assist our clients in meeting their transcription and document
management needs. We have initiated relationships with developers and end-users
of emerging technologies, such as voice-recognition, data mining and outcomes
analysis and Internet based telecommunications to create value added services
for our clients and to participate in the development of the computer based
patient record. Our Senior Vice President-New Business Development oversees our
strategic partnerships and manages our research and development department that
integrates these partnerships into useable product and service offerings. Some
of our current business partners and relationships in exploring these emerging
technologies are described below.
WebMD is an Internet-based healthcare network that connects physicians,
hospitals, third-party payers, and consumers to a virtual marketplace of
medical information, tools, and services. WebMD provides its subscribers with
access to our medical transcription services on its website.
Lernout & Hauspie Speech Products, N.V. is a global leader in advanced
speech and
20
<PAGE>
language solutions for vertical markets, computers, automobiles,
telecommunications, embedded products, consumer goods and the Internet.Lernout &
Hauspie is making the speech user interface the keystone of simple, convenient
interaction between humans and technology, and is using advanced translation
technology to break doen language barriers. With Lernout & Hauspie, we have
developed a clinical workstation that integrates voice recognition, structured
input and free-form dictation.
Synthesys Technologies, Inc. develops innovative clinical data repository
solutions for the healthcare industry. We have a co-marketing agreement with
Synthesys to sell Synthesys' data mining and outcomes analysis software to our
customer base. The software includes a search engine that provides for analysis
of transcribed clinical data.
MasterChart is a provider of solution-based technology to leading
healthcare system providers. Through an agreement with MasterChart, we offer the
Physassist Portable Dictation, a hand-held digital recorder; Respond, an
Internet document management system; and MasterChart Integration Engine, a
message translation control and monitoring middleware. MasterChart also provides
product development and software design services to MedQuist.
21
<PAGE>
MANAGEMENT
MedQuist's executive officers and directors are as follows:
<TABLE>
<CAPTION>
Year of Term
Expiration
Name Position as Director
<S> <C> <C>
David A. Cohen ........................ Chief Executive Officer and Chairman of 1999
the Board
John A. Donohoe, Jr. .................. President, Chief Operating Officer and 2001
Director
John R. Emery ......................... Senior Vice President, Treasurer and --
Chief Financial Officer
Ronald F. Scarpone .................... Senior Vice President, New Business --
Development
John M. Suender ....................... Senior Vice President, General Counsel --
and Secretary
Bruce K. Anderson ..................... Director 2000
William T. Carson, Jr. (1)(3) ......... Director 2001
John T. Casey (2) ..................... Director 2001
Richard J. Censits (1) ................ Director 2001
James R. Emshoff (1) .................. Director 2000
Terrence J. Mulligan (2) .............. Director 1999
A. Fred Ruttenberg (3) ................ Director 2000
Edward L. Samek ....................... Director 1999
R. Timothy Stack (3) .................. Director 2000
Richard H. Stowe ...................... Director 2001
John H. Underwood (2) ................. Director 1999
</TABLE>
- -------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating Committee
David A. Cohen joined MedQuist in May 1994 as President of our
Transcriptions, Ltd. subsidiary and has been an executive officer and a
director of MedQuist since July 1994, our Chief Executive Officer since
November 1995 and Chairman of the Board of Directors since July 1996. Mr. Cohen
also served as our President from November 1995 to August 1998. Mr. Cohen
joined Transcriptions, Ltd. in 1973 and served as its Chief Executive Officer
for more than 15 years.
John A. Donohoe, Jr. has been a member of the Board of Directors since
May 1998. Mr. Donohoe joined MedQuist in May 1994 as Executive Vice President
of our Transcriptions, Ltd. subsidiary. Mr. Donohoe became Chief Operating
Officer in November 1995 and President in August 1998. Mr. Donohoe was employed
by Transcriptions, Ltd. since 1974, serving in numerous management capacities.
Mr. Donohoe is a member of the board of directors of the Medical Transcription
Industry Alliance.
John R. Emery has been our Treasurer and Chief Financial Officer since
March 1997 and was promoted from Vice President to Senior Vice President in
December 1998. Prior to joining MedQuist, Mr. Emery served in various executive
positions with Integra LifeSciences Corporation beginning in 1994, most
recently as Senior Vice President -- Operations and Finance. From 1987 to 1994,
Mr. Emery served in various operational and financial positions with Chemical
Waste Management, Inc., an environmental remediation firm.
Ronald F. Scarpone has been Senior Vice President - New Business
Development since
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December 1998 and a Vice President of MedQuist since January 1996. Mr. Scarpone
joined MedQuist in May 1994 as Vice President -- Information Services. Mr.
Scarpone was employed by Transcriptions, Ltd. since 1989 and served as its Vice
President of Information Services since September 1993.
John M. Suender has been our General Counsel and Secretary since
September 1992. In December 1998, Mr. Suender was promoted to Senior Vice
President. Mr. Suender also serves as our Senior Vice President --
Acquisitions. Prior to joining MedQuist, Mr. Suender was with the law firm of
Pepper Hamilton LLP, Philadelphia, Pennsylvania.
Bruce K. Anderson has been a director of MedQuist since December 1998. He
was a director of The MRC Group from July 1993 until MRC was acquired by
MedQuist on December 10, 1998. Since 1979, Mr. Anderson has been partner of
Welsh, Carson, Anderson & Stowe, an investment firm specializing in the
acquisition of companies in the information services and health care industries.
Mr. Anderson is also Chairman, Chief Executive Officer and a director of AMDOCS
Ltd., a software and services company focused on the telephone industry, and a
director of several private companies.
William T. Carson, Jr., a director of MedQuist since January 1991, is
currently a business consultant and is Vice Chairman of CIC Investment Co., a
capital investment firm. In 1988, he co-founded and became Vice President and
corporate secretary of Covenant Bank, Haddonfield, New Jersey, positions he
held until January 1998 when Covenant Bank was acquired by First Union Bank.
Mr. Carson is also a director of the Coriell Institute of Medical Research, a
genetic research firm and a former director of the Rutgers University School of
Business.
John T. Casey, a director of MedQuist since June 1997, has been Chairman
and Chief Executive Officer of Physician Reliance Network Inc. since October
1997. PRN is a Dallas-based provider of management facilities, administration
and technical support and ancillary services necessary to establish and maintain
a fully integrated network of oncology care. Mr. Casey formerly served as
President and Chief Executive Officer of American Medical International from
1991 until 1995, when it was acquired by Tenet Healthcare. Prior to that, Mr.
Casey was Chief Executive Officer of Samaritan Health Services in Phoenix,
Arizona, Methodist Health Services in Memphis, Tennessee, and Presbyterian/St.
Luke's Medical Center in Denver, Colorado. From 1995 until September 1997, Mr.
Casey served as Chairman and Chief Executive Officer of Intecare.
Richard J. Censits has been a director of MedQuist since January 1987.
Mr. Censits was our Chief Executive Officer from January 1, 1987 until March
1995, and was President of MedQuist until September 1994. He served as the Vice
President and Chief Financial Officer of Campbell Soup Company from 1975 to
1986. Mr. Censits currently serves as a director of Checkpoint Systems, Inc.
and as a Trustee of the University of Pennsylvania.
James R. Emshoff has been a director of MedQuist since December 1992.
Mr. Emshoff also served as our acting President and Chief Executive Officer
from April 1995 through November 1995 and as our Chairman of the Board of
Directors from November 1995 through July 1996. Since August 1992, Mr. Emshoff
has been the Chairman and Chief Executive Officer of IndeCap Enterprises, Inc.,
a firm providing consulting services on corporate restructuring issues and
venture participation in the outsourcing of management service functions. From
February 1991 to August 1992, Mr. Emshoff was Chairman and Chief Executive
Officer of Wellesley Medical Management Inc., an owner and operator of primary
healthcare centers. From January 1985 to February 1991, Mr. Emshoff was
President and Chief Executive Officer of Citicorp Diners Club.
Terrence J. Mulligan has been a director of MedQuist since May 1996. Mr.
Mulligan is currently a management consultant and private investor. Mr.
Mulligan had held several senior executive positions with Baxter International,
Inc. from 1986 until his retirement in 1996, including Group Vice President,
Health Systems, from 1994 to 1996, Group Vice President, Multi-Hospital Systems
from 1993 to 1994, and Senior Vice President, Corporate Sales and Marketing
from 1988 to 1993. Mr. Mulligan also served on the Senior Management Committee
and the Operating Management Committee at Baxter. Mr. Mulligan currently serves
as a member of the Board of Visitors of the University of Iowa College of
Business Administration, and a past President of
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the University of Iowa Alumni Association, and currently serves a Trustee of
Lake Forest College. Mr. Mulligan is a member of the Board of Directors of
Physician Reliance Network and Physicians Dynamics Inc.
A. Fred Ruttenberg has been a director of MedQuist since December 1991.
Mr. Ruttenberg has, since September 1986, been a partner in the law firm of
Blank, Rome, Comisky & McCauley, Cherry Hill, New Jersey, which has acted as
special counsel to MedQuist for certain matters.
Edward L. Samek has been a director of MedQuist since December 1998.
Prior to our acquisition of The MRC Group, Mr. Samek had been employed at MRC
since 1994, most recently as Chairman and Chief Executive Officer. Mr. Samek
had also been a director of MRC since 1994. Prior to MRC's December 1994
acquisition of SecrePhone, Ltd., a provider of medical transcription services,
Mr. Samek served as SecrePhone's Chairman, President and Chief Executive
Officer. Mr. Samek has been President of The Medical Transcription Alliance,
the medical transcription association, since 1996.
R. Timothy Stack has been a director of MedQuist since May 1997. Since
1987, Mr. Stack has been the President and Chief Executive Officer of Borgess
Health Alliance, an integrated health delivery and finance system that includes
a 469 bed regional referral center, seven community hospitals, two long-term
care facilities, financing/risk products, a medical foundation and physician
group practices, representing over 1,000 acute care and nursing beds. Prior to
joining Borgess, Mr. Stack served as President and Chief Executive Officer of
South Side Healthcare System from 1981-1987 and as Senior Vice President and
Chief Operating Officer of Central Medical Center and Hospital from 1979-1981.
Richard H. Stowe has been a director of MedQuist since December 1998. He
was a director of The MRC Group from July 1993 until MRC was acquired by
MedQuist on December 10, 1998. Mr. Stowe was a partner of Welsh, Carson,
Anderson & Stowe from 1979 until January 1999. Mr. Stowe serves on the Board of
Directors of The Cerplex Group, Inc., which provides repair and parts
distribution services for electronic equipment, and Health Management Systems,
Inc., a provider of revenue enhancement services to health care providers and
payors, New American Healthcare Corporation, a company that services and
manages non-urban hospitals, and several private companies.
John H. Underwood has been a director of MedQuist since July 1994. Mr.
Underwood is currently Managing Director with Pfingsten Partners, L.L.C., a
firm which originates and manages private equity investments in middle market
companies. Prior to joining Pfingsten Partners in December 1996, Mr. Underwood
had been, since 1989, a Vice President with Heller Equity Capital Corporation
and a Senior Vice President of its parent, Heller Financial, Inc. From 1986 to
1989, Mr. Underwood served as a Vice President of Citicorp North America, Inc.
as a member of its leveraged capital group.
DESCRIPTION OF CAPITAL STOCK
MedQuist is authorized to issue up to 60,000,000 shares of common stock.
As of March 22, 1999, MedQuist had 33,727,120 outstanding shares of common
stock and approximately 4,700,000 shares of common stock reserved for issuance
upon exercise of options granted under MedQuist's option plans. Holders of
common stock are entitled to one vote per share on all matters to be voted upon
by the shareholders. Subject to the rights of any preferred stock holders,
holders of common stock are entitled to receive such dividends as the Board of
Directors may declare in its discretion. In the event of a liquidation,
dissolution or winding up of MedQuist, after payment of liabilities and any
liquidation preference on any shares of preferred stock then outstanding, the
holders of shares of common stock are entitled to a distribution of any
remaining assets of MedQuist. Holders of common stock have no cumulative voting
or preemptive rights. All outstanding shares of common stock are, and the shares
of common stock offered hereby, when issued and paid for will be, fully paid and
non-assessable.
MedQuist is also authorized to issue up to 12,111,975 shares of
preferred stock, no par value. We do not currently contemplate the issuance of
any shares of preferred stock. Without any further action by the shareholders,
our board of directors may issue from time to time the authorized and unissued
shares of preferred stock
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<PAGE>
in one or more series, and may determine as to each series the designation and
number of shares to be issued and the relative rights, preferences and
limitations of the shares of each series, including provisions with respect to
voting powers, redemption, conversion, dividend rights and liquidation
preferences. The issuance of preferred stock could adversely affect the voting
power of the holders of common stock or could have the effect of deterring or
delaying any attempt by a person or group to obtain control of MedQuist.
Registration Rights
Under the terms of a registration rights agreement between MedQuist and
the sellers of Transcriptions, Ltd., Mr. Cohen is entitled to incidental
registration rights with respect to the resale of up to approximately 1,330,000
shares of their common stock. These registration rights will expire on August 1,
2002. MedQuist is obligated to pay the registration expenses in any such
registration unless the registration is initiated by another shareholder. Mr.
Cohen has waived the right to include any of his common stock in this offering.
Takeover Protection
The New Jersey Shareholders Protection Act prohibits, subject to certain
exceptions, New Jersey corporations, such as MedQuist, from engaging in any
business combination with any interested shareholder for a period of five years
following the date that such shareholder becomes an interested shareholder. A
business combination includes mergers, asset sales and other transactions that
may result in a financial benefit to shareholders. A person will be deemed an
interested shareholder if the person, with any affiliate or associate,
beneficially owns, directly or indirectly, 10% or more our outstanding stock.
However, if our board of directors approves the business combination or the
transaction that results in the shareholder becoming an interested shareholder,
then the restrictions do not apply. After the five year waiting period, we
could enter into a business combination with an interested shareholder if
o shareholders holding at least 662/3% of our outstanding stock approve
the business combination, or
o the business combination provides that all shareholders, other than
the interested shareholder, get a fair price for their shares.
<PAGE>
This protection does not apply to business combinations with persons who
became interested shareholders before
o the corporation began filing under the Securities Act, or
o the corporation's securities were traded on a national exchange.
We have no additional anti-takeover protection other than
o the ability of the board of directors to issue, from time to time, up
to 12,111,975 shares of preferred stock in one or more series without
shareholder approval, and
o the separation of the board of directors into three classes.
Our option plan, in certain circumstances, provides for the automatic
vesting of all outstanding options upon a change in control of MedQuist. A
change in control includes a liquidation, a sale of all or substantially all of
our assets, an acquisition of MedQuist, the election of a majority of the
members of the board of directors as a result of proxy contests within any
period of three years, approval of a merger or a tender offer. The ability to
accelerate the vesting or exercise of options could be utilized as a method of
discouraging, delaying or preventing a change in control of our stock.
MedQuist has a severance plan for certain executive officers. The plan
provides that, under certain circumstances, the termination of covered
executives within 12 months after a change in control will trigger payments to
the terminated executive that will increase the cost of acquiring MedQuist and
that could discourage a change in control of our stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company, New York, New York.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the common stock as of March 22, 1999 adjusted to reflect the sale
of shares offered hereby for
o each person who is known by us to own beneficially more than five
percent of the common stock,
o each executive officer listed below,
o each director,
o all current executive officers and directors as a group; and
o each selling shareholder.
The selling shareholders have furnished to us the information set forth
below and this information is accurate to the best of our knowledge.
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Stock
Beneficially Owned
Beneficially Owned Before Shares to After
Name and Address(2) the Offering(1) be Sold the Offering(1)
- -------------------------------------------- -------------------------------------- ----------- ----------------------
Number Percentage(3) Number Percentage(3)
-------------------- --------------- -------- --------------
<S> <C> <C> <C> <C> <C>
Pilgram Baxter & Associates, Ltd. ......... 2,371,900(4) 7.0% -- 2,371,900 6.8%
825 Duportial Road
Wayne, PA 19087
Welsh, Carson, Anderson & Stowe, VI, LP(3) 3,275,884(5) 9.7 1,000,000 2,275,884 9.4
320 Park Avenue
Suite 2500
New York, NY 10022
David A. Cohen ............................ 1,574,723(6) 4.6 -- 1,574,723 4.5
John A. Donohoe, Jr. ...................... 283,279(7) * -- 282,279 *
John R. Emery ............................. 11,034(8) * -- 11,034 *
Ronald F. Scarpone ........................ 80,135(9) * -- 80,135 *
John M. Suender ........................... 45,079(10) * -- 45,079 *
Bruce K. Anderson ......................... 3,295,301(11) 9.8 1,000,000 2,295,301 6.6
William T. Carson, Jr. .................... 100,570(12) * -- 100,570 *
John T. Casey ............................. 17,685(13) * -- 17,685 *
Richard J. Censits ........................ 339,145(14) 1.0 -- 339,145 *
James R. Emshoff .......................... 140,795(15) * -- 140,795 *
Terrence J. Mulligan ...................... 32,023(16) * -- 32,023 *
A. Fred Ruttenberg ........................ 96,026(17) * -- 96,026 *
Edward L. Samek ........................... 784,830(18) 2.3 2,350,000 434,830 1.2
R. Timothy Stack .......................... 19,807(19) * -- 19,807 *
Richard H. Stowe .......................... 3,282,194(20) 9.7 1,000,000 2,282,194 6.6
John H. Underwood ......................... 18,676(21) * -- 18,676 *
All executive officers and directors as a
group (16 persons)....................... 6,845,418(22) 19.5% 1,350,000 5,495,418 15.2
Other selling shareholders:
William Blair Capital Partners V, L.P. .... 1,122,077(23) 3.3 350,000 772,077 2.2
H. and R. Marcus Family Limited Partnership 1,099,202(24) 3.3 750,000 349,202 *
M. and L. Marcus Family Limited Partnership 649,961(25) 1.9 500,000 149,961 *
John H. Dayani, Sr. ....................... 618,891(26) 1.8 243,467 375,424 *
</TABLE>
26
<PAGE>
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission, and includes voting or investment power with respect to the
shares beneficially owned. Shares of common stock subject to options or
warrants currently exercisable within 60 days after March 22, 1999 are
deemed outstanding for computing the percentage ownership of the person
holding such options or warrants but are not deemed outstanding for
computing the percentage ownership of any other person.
(2) Except where otherwise noted, the address of all persons listed is c/o
MedQuist Inc., Five Greentree Centre, Suite 311, Marlton, New Jersey
08053.
(3) Applicable percentage of ownership as of March 22, 1999 is based upon
33,727,120 shares of common stock outstanding before the offering and
34,727,120 shares of common stock outstanding after the offering.
(4) Reflects information set forth in a Schedule 13G filed by Pilgrim, Baxter
& Associates, Ltd.
(5) The general partners of WCAS VI are Patrick I. Welsh, Russell L. Carson,
Andrew M. Paul, Thomas E. McInerney, Laura van Buren, James B. Hoover,
Bruce K. Anderson, Robert A. Minicucci, Anthony J. de Nicola, Paul B.
Queally and Richard H. Stowe.
(6) Includes 246,000 shares of common stock issuable upon the exercise of
options granted to Mr. Cohen. Mr. Cohen owns 1,328,116 shares jointly with
his spouse.
(7) Includes 169,392 shares of common stock issuable upon the exercise of
options granted to Mr. Donohoe and 41,000 shares of common stock owned by
Mr. Donohoe's children.
(8) Includes 11,000 shares of common stock issuable upon the exercise of
options granted to Mr. Emery.
(9) Includes 59,088 shares of common stock issuable upon the exercise of
options granted to Mr. Scarpone.
(10) Includes 27,000 shares of common stock issuable upon the exercise of
options granted to Mr. Suender.
(11) Includes 3,275,884 shares of common stock held by WCAS, VI and 455 shares
issuable under MedQuist's Deferred Compensation Plan for Non-Employee
Directors (the "Deferred Stock Plan"). Mr. Anderson disclaims beneficial
ownership of WCAS, VI shares except to the extent of his pecuniary
interest therein.
(12) Includes 55,000 shares of common stock issuable upon the exercise of
options granted to Mr. Carson and 28,700 shares of common stock held for
Mr. Carson's benefit in individual retirement accounts.
(13) Includes 15,000 shares of common stock issuable upon the exercise of
options granted to Mr. Casey and 2,685 shares issuable under the Deferred
Stock Plan.
(14) Includes 201,300 shares of common stock owned by Mr. Censits' spouse.
<PAGE>
(15) Includes 101,806 shares of common stock issuable upon the exercise of
options granted to Mr. Emshoff and 3,231 shares issuable under the
Deferred Stock Plan.
(16) Includes 24,000 shares of common stock issuable upon the exercise of
options granted to Mr. Mulligan and 5,023 shares issuable under the
Deferred Stock Plan.
(17) Includes 79,200 shares of common stock issuable upon the exercise of
options granted to Mr. Ruttenberg and 7,828 shares issuable under the
Deferred Stock Plan.
(18) Includes 618,795 shares of common stock issuable upon the exercise of
options granted to Mr. Samek.
(19) Includes 15,000 shares of common stock issuable upon the exercise of
options granted to Mr. Stack and 814 shares issuable under the Deferred
Stock Plan.
(20) Includes 3,275,884 shares of common stock held by WCAS, VI and 455 shares
issuable under the Deferred Stock Plan. Mr. Stowe disclaims beneficial
ownership of the WCAS, VI shares, except to the extent of his pecuniary
interest therein.
(21) Includes 15,000 shares of common stock issuable upon the exercise of
options granted to Mr. Underwood and 3,673 shares issuable under the
Deferred Stock Plan.
(22) Includes 1,436,281 options granted to directors and executive officers,
24,164 shares issuable under the Deferred Stock Plan and 3,275,880 shares
beneficially owned by WCAS, VI. See Note 5 above.
(23) The general partner of William Blair Capital Partners V, L.P. is William
Blair Capital Partners LLC. The members of William Blair Capital Partners
LLC are William Blair & Company, L.L.C., Wilblairco, Ellen Carnahan, David
G. Chandler, James M. Denny, Samuel B. Guren, Edgar D. Jannotta, Edgar D.
Jannotta, Jr., Ian M. Larkin, Timothy M. Murray, Gregg S. Newmark,
Lawrence I. Shagrin, and Thomas C. Theobold.
(24) The 1991 L.W. Marcus Living Trust is the general partner of the M. and L.
Marcus Family Limited Partnership. Lois W. Marcus is the sole trustee of
the 1991 L.W. Marcus Living Trust. Mrs. Marcus is the wife of Martin H.
Marcus.
(25) The Herbert L. Marcus Living Trust is the general partner of the H. and R.
Marcus Family Limited Partnership. Herbert L. Marcus is the sole trustee of
the Herbert L. Marcus Living Trust.
(26) Includes 90,353 shares of Common Stock issuable upon the exercise of
options granted to Mr. Dayani.
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<PAGE>
U.S. TAX CONSEQUENCES TO
NON-U.S. HOLDERS OF COMMON STOCK
The following discussion summarizes certain U.S. federal income and
estate tax consequences of the ownership and disposition of common stock by a
"non-U.S. holder." You are a "non-U.S. holder" if you are, for United States
federal income tax purposes:
o a non-resident alien individual,
o foreign corporation,
o a foreign partnership, or
o a foreign estate or trust.
This discussion does not consider the specific facts and circumstances
that may be relevant to a particular non-U.S. holder and does not address the
treatment of a non-U.S. holder under the laws of any state, local or foreign
taxing jurisdiction. The discussion is based on the tax laws of the United
States, which include the Internal Revenue Code of 1986, as amended, existing
regulations (some of which do not become effective until January 1, 2000), and
administrative interpretations and judicial decisions. The tax laws are subject
to change, and the changes can be applied on a retroactive basis. You should
consult a tax advisor regarding the U.S. federal tax consequences of acquiring,
holding and disposing of common stock in your particular circumstances, as well
as any tax consequences that may arise under the laws of any state, local or
foreign taxing jurisdiction.
Dividends
If you are a non-U.S. holder of common stock, dividends paid to you
before January 1, 2000 will be subject to withholding of United States federal
income tax at a 30% rate unless:
o you are eligible for the benefits of an income tax treaty that
provides for a lower rate, or
o the dividends are "effectively connected" with your conduct of a trade
or business in the United States.
If the dividends are "effectively connected" with your conduct of a
trade or business within the United States and you provide us a form 4224 on
which you certify that the dividends are "effectively connected" to your U.S.
trade or business, no federal income tax will be withheld (unless we know the
form is inaccurate). Unless an applicable income tax treaty provides otherwise,
the "effectively connected" dividends will be subject to federal income tax at
the rates applicable to U.S. resident individuals or domestic corporations.
If you are a foreign corporation and the dividends are "effectively
connected" to your U.S. trade or business, in addition to the corporate income
tax, you may, under certain circumstances, be subject to the "branch profits
tax." The branch profits tax, to the extent it applies, is generally 30% of the
effectively connected income (after reduction for the federal corporate income
taxes paid by you on the income). The branch profits tax may be reduced if you
are eligible for the benefits of an income tax treaty that provides for a lower
rate.
If the dividends paid on your common stock before January 1, 2000, are
paid to an address in a foreign country, and you have not provided us with a
form 4224 (claiming that the dividends are effectively connected to your U.S.
trade or business), we will assume that the dividend is subject to the 30%
withholding tax, or the lower rate provided in the income tax treaty between
the United States and the country to which we send the dividend.
For dividends paid on or after January 1, 2000, you will generally be
subject to either the 30% withholding tax described above, or the 31% "back-up"
withholding tax (which generally applies only to U.S. persons), unless;
o you provide us with certification on form w-8 (or its successor form)
that you are a foreign person, so that the "back-up" withholding does
not apply, or you are a person that is not subject to back-up
withholding even if you are a U.S. person (such as a corporation),
and, with respect to the 30% withholding tax,
o you provide us with certification on form w-8 (or its successor form)
that the dividends are "effectively connected" to your conduct of a
U.S. trade or business (which will require that you have a U.S.
Taxpayer Identification Number), or
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<PAGE>
o you provide us with certification on form W-8 (or its successor form)
that the 30% withholding tax should be reduced under an applicable
income tax treaty that you are eligible to use. So long as the common
stock is traded in on a recognized exchange, an individual or
corporation does not have to have a U.S. Taxpayer Identification
Number to complete this certification.
If you are a foreign partnership, the certifications required for
dividends paid on or after January 1, 2000 generally will apply to the partners
of the partnership, and the partnership will be required to provide certain
information. Under certain circumstances, (which require an agreement be filed
with the Internal Revenue Service), a foreign partnership that owns common
stock may be able to assume our withholding obligations on dividend payments
made on or after January 1, 2000.
If you are eligible for a reduced rate of U.S. withholding tax under a
tax treaty, you may obtain a refund of any amounts withheld in excess of that
rate by filing a refund claim with the Internal Revenue Service.
Gain on Disposition of Common Stock
If you are a non-U.S. holder, you generally will not be subject to
United States federal income tax on gain that you recognize on a disposition of
Common Stock unless:
o the gain is "effectively connected" with your conduct of a trade or
business in the United States (and the gain is attributable to a
permanent establishment that you maintain in the United States, if
that is required by an applicable income tax treaty as a condition
for subjecting you to U.S. taxation on a net income basis),
o you are an individual, you hold the common stock as a capital asset,
and you are present in the United States for 183 or more days in the
taxable year of the sale and certain other conditions exist, or
o MedQuist is or has been a "United States real property holding
corporation" for federal income tax purposes and you held, directly
or indirectly at any time during the five-year period ending on the
date of disposition, more than 5% of the common stock (and you are
not eligible for any treaty exemption).
If you are a foreign corporation, "effectively connected" gains that you
recognize may also, under certain circumstances, be subject to an additional
"branch profits tax." The branch profits tax, to the extent it applies, is
generally 30% of the "effectively connected income" (after reduction for the
federal corporate income taxes paid by you on the income). The branch profits
tax may be reduced if you are eligible for the benefits of an income tax treaty
that provides for a lower rate.
The Company has not been, is not, and does not anticipate becoming a
"United States real property holding corporation" for federal income tax
purposes.
Federal Estate Taxes
Common Stock held by a non-U.S. holder at the time of death will be
included in the holder's gross estate for United States federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
In general, dividends paid to you before January 1, 2000 will not be
subject to U.S. information reporting requirements and backup withholding tax
if the dividend is paid to you outside the United States (unless we know you
are a U.S. person).
For payments of dividends made on or after January 1, 2000, as described
above in the "Dividends" section, back-up withholding will apply unless we
receive a certification that you are a foreign person, or you are otherwise
exempt from the backup withholding rules.
If you sell your common stock outside of the United States through a
non-U.S. office of a non-U.S. broker, and the sale proceeds are paid to you
outside the United States, then U.S. backup withholding and information
reporting requirements generally will not apply to that payment. However, U.S.
information reporting (but not backup withholding) will apply to a payment of
sales proceeds (even if that payment is made to you outside the United States)
if you sell your common stock through a non-U.S. office of a broker that:
29
<PAGE>
o is a U.S. person,
o derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States
o is a "controlled foreign corporation" as to the United States, or
o with respect to payments made after December 31, 1999, is a foreign
partnership, if at any time during its tax year:
o one or more of its partners are U.S. persons (as defined in
U.S. Treasury regulations) who in the aggregate hold more than
50% of the income or capital interest in the partnership, or
o such foreign partnership is engaged in a U.S. trade or
business, unless the broker has documentary evidence in its
files that you are a non-U.S. person or you otherwise
establish an exemption.
If you receive payment of the proceeds of a sale of common stock to or
through a U.S. office of a broker, the payment is subject to both United States
backup withholding of 31% and information reporting unless you certify that you
are a non-U.S. person (under penalties of perjury) or you otherwise establish
an exemption.
You generally may obtain a refund of any amounts withheld under the
backup withholding rules that exceed your income tax liability by filing a
refund claim with the Internal Revenue Service.
LEGAL MATTERS
Pepper Hamilton LLP will issue an opinion that the shares offered by
MedQuist and the selling stockholders are validly issued. The validity of the
common stock offered hereby will be passed upon for the underwriters by
Sullivan & Cromwell, New York, New York. Sullivan & Cromwell will rely as to all
matters of New Jersey law on Pepper Hamilton LLP.
EXPERTS
The audited consolidated financial statements of MedQuist Inc. and
subsidiaries included 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 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
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.
30
<PAGE>
WHERE YOU CAN FIND ADDITIONAL 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 are
incorporated herein by this reference:
<TABLE>
<CAPTION>
SEC Filing Period (or Date Filed)
- ----------------------------------------------------------- -----------------------------
<S> <C>
Current Report on Form 8-K March 25, 1999
Annual Report on Form 10-K (including those portions of Year ended December 31, 1998
MedQuist's proxy statement for its 1999 annual meeting
of shareholders incorporated by reference in the Annual
Report on Form 10-K)
Registration Statement on Form S-4 (but only with respect October 30, 1998
to the audited financial statements of The MRC Group,
Inc. included therein)
Registration Statement on Form 8-A filed pursuant to March 11, 1992
Section 12(g) of the Exchange Act
</TABLE>
- ----------
All documents filed by MedQuist pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this prospectus and prior
to the termination of the offering will be deemed to be incorporated by
reference in this prospectus and to be a part of this prospectus from the date
that document is filed.
31
<PAGE>
MEDQUIST INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants ................ F-2
Consolidated Balance Sheets ............................. F-3
Consolidated Statements of Operations ................... F-4
Consolidated Statements of Shareholders' Equity ......... F-5
Consolidated Statements of Cash Flows ................... F-6
Notes to Consolidated Financial Statements .............. F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MedQuist Inc.:
We have audited the accompanying consolidated balance sheets of MedQuist
Inc. (a New Jersey corporation) and Subsidiaries as of December 31, 1997 and
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MedQuist
Inc. and Subsidiaries as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Philadelphia, Pa.,
February 1, 1999
F-2
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1998
----------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 14,489 $ 15,936
Short-term investments ............................................. 4,003 --
Accounts receivable, net of allowance of $1,298 and $2,274 ......... 41,819 52,477
Deferred income taxes .............................................. 3,177 6,438
Prepaid expenses and other ......................................... 307 233
--------- ---------
Total current assets ............................................ 63,795 75,084
Property and equipment, net ........................................... 25,442 27,022
Intangible assets, net ................................................ 82,382 82,216
Other ................................................................. 2,154 2,989
--------- ---------
$ 173,773 $ 187,311
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................................. $ 6,792 $ 2,372
Accounts payable ................................................... 5,777 5,010
Accrued expenses ................................................... 14,618 25,850
--------- ---------
Total current liabilities ....................................... 27,187 33,232
--------- ---------
Long-term debt ........................................................ 7,589 215
--------- ---------
Other long-term liabilities ........................................... 1,130 697
--------- ---------
Deferred income taxes ................................................. 6,494 1,981
--------- ---------
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock, no par value, 60,000 shares authorized, 32,138
and 33,258 shares issued and outstanding .......................... -- --
Additional paid-in capital ......................................... 119,008 136,603
Retained earnings .................................................. 12,365 14,536
Unrealized gain on marketable securities ........................... -- 585
Deferred compensation .............................................. -- (538)
--------- ---------
Total shareholders' equity ...................................... 131,373 151,186
--------- ---------
$ 173,773 $ 187,311
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1997 1998
------------ -------------- ------------
<S> <C> <C> <C>
Revenue ................................................ $ 152,109 $ 216,158 $ 271,655
--------- ---------- ---------
Costs and expenses:
Cost of revenue ..................................... 118,978 169,235 209,587
Selling, general and administrative ................. 11,908 14,362 16,061
Depreciation ........................................ 7,372 10,339 12,697
Amortization of intangible assets ................... 3,150 5,652 3,757
Transaction costs and restructuring charges ......... 644 2,075 18,221
--------- ---------- ---------
Total operating expenses ......................... 142,052 201,663 260,323
--------- ---------- ---------
Operating income ....................................... 10,057 14,495 11,332
Interest expense (income), net ......................... 2,049 469 (325)
--------- ---------- ---------
Income before income taxes ............................. 8,008 14,026 11,657
Income tax provision ................................... 2,720 5,293 8,472
--------- ---------- ---------
Net income ............................................. 5,288 8,733 3,185
Inducement of warrant exercise ......................... (707) -- --
--------- ---------- ---------
Net income available to common shareholders ............ $ 4,581 $ 8,733 $ 3,185
========= ========== =========
Basic income per share:
Net income .......................................... $ 0.22 $ 0.28 $ 0.10
Inducement of warrant exercise ...................... ( 0.03) -- --
--------- ---------- ---------
Net income available to common shareholders ......... $ 0.19 $ 0.28 $ 0.10
========= ========== =========
Diluted income per share:
Net income .......................................... $ 0.20 $ 0.26 $ 0.09
Inducement of warrant exercise ...................... ( 0.03) -- --
--------- ---------- ---------
Net income available to common shareholders ......... $ 0.17 $ 0.26 $ 0.09
========= ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Additional Unrealized
Common Stock Gain on
-------------------- Paid-in Retained Marketable Deferred
Shares Amount Capital Earnings Securities Compensation Total
---------- -------- ------------ ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 ........... 13,182 $ -- $ 29,493 $ 1,079 $ -- $ -- $ 30,572
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 .......................... 10,395 -- 68,714 -- -- -- 68,714
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
and warrants, including tax
benefit ........................... 759 -- 3,455 -- -- -- 3,455
Issuance 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)
------ ---- --------- -------- ----- -------- ---------
BALANCE, DECEMBER 31, 1997 ........... 32,138 -- 119,008 12,365 -- -- 131,373
Comprehensive income:
Net income ........................ -- -- -- 3,185 -- -- 3,185
Unrealized gain on available for
sale securities, net of tax ...... -- -- -- -- 585 -- 585
------ ---- --------- -------- ----- -------- ---------
Total comprehensive income ....... -- -- -- 3,185 585 -- 3,770
------ ---- --------- -------- ----- -------- ---------
Exercise of common stock options
and warrants, including tax
benefit ........................... 917 -- 9,662 -- -- -- 9,662
Issuance of common stock, net of
expenses .......................... 203 -- 1,701 -- -- -- 1,701
Distributions ....................... -- -- -- (1,014) -- -- (1,014)
Grant of common stock options
below fair value .................. -- -- 1,078 -- -- (1,078) --
Amortization of deferred
compensation ...................... -- -- -- -- -- 540 540
Cash paid to dissenting stockhold-
ers in pooling of interests
transaction ....................... -- -- (1,438) -- -- -- (1,438)
Transaction costs paid by acquired
company stockholder ............... -- -- 1,540 -- -- -- 1,540
Income tax asset recognized in
pooling of interests transaction .. -- -- 5,052 -- -- -- 5,052
------ ---- --------- -------- ----- -------- ---------
BALANCE, DECEMBER 31, 1998 ........... 33,258 $ -- $ 136,603 $ 14,536 $ 585 $ (538) $ 151,186
====== ==== ========= ======== ===== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................................ $ 5,288 $ 8,733 $ 3,185
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization ................................... 10,522 15,991 16,454
Amortization of debt discounts .................................. 704 -- --
Amortization of deferred compensation ........................... -- -- 540
Deferred income tax provision (benefit) ......................... 1,105 (200) (3,213)
Loss on disposal of property and equipment ...................... -- 223 --
Transaction costs paid by acquired company stockholder .......... -- -- 1,540
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures--
Accounts receivable, net ..................................... (5,571) (7,230) (10,345)
Prepaid expenses and other ................................... 1,403 631 97
Other assets ................................................. 182 (362) 65
Accounts payable ............................................. (1,983) 543 (767)
Accrued expenses ............................................. (832) 3,175 15,729
Other long-term liabilities .................................. (79) (87) (433)
--------- --------- ---------
Net cash provided by operating activities ................... 10,739 21,417 22,852
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment ............................... (6,553) (13,716) (14,027)
Acquisitions, net of cash acquired ................................ (26,205) (5,628) (5,839)
Sale (purchase) of short-term investments ......................... (5,893) 973 4,003
--------- --------- ---------
Net cash used in investing activities ....................... (38,651) (18,371) (15,863)
--------- --------- ---------
FINANCING ACTIVITIES:
Repayments of long-term debt and subordinated payable ............. (38,728) (3,757) (10,006)
Proceeds from issuance of long-term debt .......................... 7,121 -- --
Distributions ..................................................... (928) (1,100) (1,014)
Proceeds from exercise of common stock options and
warrants ........................................................ 226 1,785 5,065
Net proceeds from issuance of common stock ........................ 68,714 251 413
Purchase and retirement of common stock ........................... (296) (676) --
--------- --------- ---------
Net cash provided by (used in) financing activities ......... 36,109 (3,497) (5,542)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ....................................................... 8,197 (451) 1,447
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ....................... 6,743 14,940 14,489
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................. $ 14,940 $ 14,489 $ 15,936
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background and Basis of Presentation
MedQuist Inc. (the "Company" or "MedQuist") is the leading national
provider of medical transcription services. MedQuist was incorporated in New
Jersey in 1984 and reorganized in 1987. From 1995 through 1998, the Company
completed 18 acquisitions, of which 13 were accounted for as purchase
transactions and five were accounted for as pooling of interests (see Note 2).
The pooling of interests transactions, all of which occurred in 1998, include
the acquisitions of Digital Dictation, Inc. ("DDI"), Signal Transcriptions
Network, Inc. ("Signal"), Transcriptions Ltd. of Florida, Inc. ("TLF") and The
MRC Group, Inc. ("MRC") which required restatement of the Company's financial
statements. Accordingly, the accompanying financial statements have been
restated to reflect these 1998 acquisitions accounted for under the pooling of
interests method.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
MedQuist and its subsidiaries. All material intercompany balances and
transactions have been eliminated.
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
reports.
Pro Forma Presentation for 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
financial statements related to their income prior to their respective
acquisition dates. The following pro forma presentation sets forth the
Company's income tax provision, net income and net income per share as if
Signal and TLF had been taxed as "C" Corporations for all periods presented.
F-7
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
Income before income taxes, as reported ......... $ 8,008 $ 14,026 $ 11,657
Pro forma income tax provision .................. 3,357 5,975 8,766
-------- --------- ---------
Pro forma net income ............................ $ 4,651 $ 8,051 $ 2,891
======== ========= =========
Pro forma net income per share:
Basic .......................................... $ 0.19 $ 0.25 $ 0.09
Diluted ........................................ $ 0.18 $ 0.24 $ 0.08
</TABLE>
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.
Investments
Short-term investments held by the Company at December 31, 1997 consisted
primarily of investments in high-quality, fixed-income bonds with varying
maturities and rates. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the Company classified their investments as
held-to-maturity since the Company had both the intent and ability to hold to
maturity. Accordingly, such investments were carried at amortized cost.
Included in other assets at December 31, 1998, is a warrant to purchase
common stock in Learnout and Hauspie, Inc. ("L&H"). The warrant has been
classified as available-for-sale. Pursuant to SFAS No. 115, available-for-sale
securities are carried at fair value, with unrealized gains and losses, net of
tax, reported as a separate component of shareholders' equity. The unrealized
gain, net of taxes, at December 31, 1998 was $585.
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.
Intangible Assets
Intangible assets consist primarily of goodwill, customer lists,
non-compete agreements and employee bases. The goodwill related to the May 1994
acquisition of Transcriptions, Ltd. (see Note 2) is being amortized over 40
years. All other goodwill 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
F-8
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
in measuring whether the intangible asset should be written down to fair value.
Measurement of the amount of the impairment will be based on generally accepted
valuation methodologies, as deemed appropriate. As of December 31, 1998,
management believes that no revision to the remaining useful lives or
write-down of intangible assets is required.
Transaction Costs and Restructuring Charges
During 1996, 1997 and 1998, the Company incurred certain charges resulting
from restructurings and in 1998 incurred transaction costs associated with
pooling of interests acquisitions and professional fees in connection with
MRC's terminated initial public offering, as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Restructuring charges .......................................... $ 644 $ 2,075 $ 6,539
Transaction costs associated with pooling of interests ......... -- -- 11,000
Terminated initial public offering costs ....................... -- -- 682
----- ------- --------
$ 644 $ 2,075 $ 18,221
===== ======= ========
</TABLE>
In December 1998, the Company's board of directors approved management's
restructuring plan associated with the MRC merger. Costs associated with the
plan of approximately $6,539 have been recognized in 1998 in accordance with
Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," as follows:
Non-cancelable leases ................................. $ 3,835
Severance ............................................. 1,618
Non-cancelable contracts and other exit costs ......... 1,086
-------
$ 6,539
=======
The plan relates primarily to the closure of several redundant customer
service centers as well as certain corporate offices in order to improve
operating efficiencies. The Company expects to complete the plan in 1999. The
severance costs are attributable to 41 individuals from various levels of
operational and senior management. As of December 31, 1998, $567 of severance
had been paid and $410 of other restructuring costs had been paid. The
consolidated balance sheet at December 31, 1998 reflects $5,562 in accrued
expenses related to the 1998 restructuring charge.
In 1997, MRC approved a separate management plan to close and/or merge
several redundant customer service centers in order to further reduce costs and
improve operating efficiencies. The plan was completed during 1998 and included
the cost of exiting certain facilities, primarily related to non-cancelable
leases, the disposition of fixed assets and employee severance costs. Costs
associated with the plan of approximately $2,075 were recognized in 1997 in
accordance with EITF 94-3. 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. At December 31, 1997 and 1998, approximately
$1,773 and $1,213, respectively, related to MRC's restructuring charge is
included in accrued expenses.
F-9
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
In 1996, MRC approved a separate management plan to close and/or merge
several redundant customer service centers 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 were recognized in
1996 in accordance with EITF 94-3.
In 1998, the Company incurred the following transaction costs associated
with business combinations accounted for using the pooling of interests method:
Investment banker fees .................................. $ 7,200
Accounting, legal and other professional fees ........... 2,260
Broker fee paid by acquired company stockholder ......... 1,540
--------
$ 11,000
========
At December 31, 1998, $500,000 of such costs are included in accrued
expenses for payments scheduled to be made in 1999.
Advertising Costs
The Company charges advertising costs to expense as incurred. Advertising
expense was $329, $678 and $650 for the years ended December 31, 1996, 1997 and
1998, respectively.
Research and Development Costs
Research and development costs are charged to expense as incurred. Total
research and development costs were approximately $450, $550 and $813 for the
years ended December 31, 1996, 1997 and 1998, respectively.
Statements of Cash Flow Information
For the years ended December 31, 1996, 1997 and 1998, the Company paid
interest of $1,404, $1,027 and $695, respectively, and income taxes of $1,700,
$3,162 and $6,705, respectively. Capital lease obligations of $191, $174 and
$98 were incurred on equipment leases entered into in 1996, 1997 and 1998,
respectively. In 1996, the Company exchanged $500 of debt for shares of capital
stock. In 1998, convertible notes totaling $1,288 were converted into 172
shares of common stock.
The following table displays the net noncash financing activities
resulting from the Company's business acquisitions (see Note 2):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1997 1998
----------- ---------- ----------
<S> <C> <C> <C>
Noncash net assets acquired ........................................ $ 40,274 $ 8,965 $ 4,401
Less -- Seller notes and payables .................................. (3,318) (3,337) --
Common stock issued ................................................ (10,751) -- --
Cash paid to dissenting stockholder in pooling transaction ......... -- -- 1,438
--------- -------- -------
Net cash paid for business acquisitions ........................... $ 26,205 $ 5,628 $ 5,839
========= ======== =======
</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.
F-10
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Earnings Per Share
The Company follows SFAS No. 128, "Earnings per Share," which requires a
dual presentation of "basic" and "diluted" earnings per share on the face of
the income statement. Basic earnings per share is calculated by dividing net
income by the weighted average number of shares of common stock outstanding for
the period. Diluted earnings 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
consists primarily of stock options, using the treasury stock method.
The table below sets forth the reconciliation of the numerators and
denominators of the Company's basic and diluted income per share computations:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------------------
1996 1997 1998
--------------------------------- --------------------------------- ---------------------------------
Per Per Per
Net Share Share Net Share
Income Shares Amount Income Shares Amount Income Shares Amount
---------- -------- ----------- ---------- -------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic ............... $ 5,288 24,138 $ 0.22 $ 8,733 31,726 $ 0.28 $ 3,185 33,087 $ 0.10
Effect of dilutive
securities ......... -- 1,906 ( 0.02) -- 1,632 ( 0.02) -- 1,818 ( 0.01)
------- ------ ------- ------- ------ ------- ------- ------ -------
Diluted ............. $ 5,288 26,044 $ 0.20 $ 8,733 33,358 $ 0.26 $ 3,185 34,905 $ 0.09
======= ====== ======= ======= ====== ======= ======= ====== =======
</TABLE>
For the years ended December 31, 1996, 1997 and 1998, 1,288, 1,961 and 654
common stock options and warrants were excluded from the diluted computation
because their effect would be anti-dilutive.
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued expenses are
reflected in the accompanying financial statements at fair value due to the
short-term nature of those instruments. Available-for-sale investments are also
reflected at fair value in accordance with SFAS No. 115. The carrying amount of
long-term notes receivable and debt obligations approximate fair value at the
balance sheet dates.
Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of general-purpose
financial statements that is presented with equal prominence as other financial
statements. The Company's comprehensive income consists of net income and
unrealized holding gains on available-for-sale securities. The adoption of SFAS
No. 130 had no impact on total shareholders' equity and is presented on the
accompanying Consolidated Statements of Shareholders' Equity. During 1996 and
1997, there were no other comprehensive items. For the years ended December 31,
1998, the pre-tax unrealized gain on available-for-sale securities was $900 and
the deferred tax recorded on the unrealized gain was $315.
Segment Reporting
In June 1997, the Financial Accounting Standards Board 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. As the Company operates in one reportable segment, SFAS No. 131 had
no effect on the Company's financial statements.
F-11
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
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 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, 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. 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 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, 1996.
Year Ended
December 31, 1996
------------------
Revenue ............................. $ 179,683
Net income .......................... 726
Net income per share ................ .03
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 of accounting. The
Company issued 619 shares of its common stock and approximately $1,400 in cash
to a dissenting Signal stockholder 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 elected to treat their merger
as an asset purchase for income tax purposes. The Company recorded a deferred
tax asset of $5,052 that was credited directly to shareholders' equity to
reflect the tax effect of goodwill that was recorded for income tax purposes.
F-12
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
2. ACQUISITIONS -- (Continued)
On November 30, 1998, the Company completed the acquisition of TLF, which
was 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 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, each share of MRC common stock and each share of MRC preferred stock
on an as-converted basis was exchanged for 0.5163 shares of the Company's
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 was accounted for as a
pooling of interests. Accordingly, the Company's 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, 1996, 1997 and 1998 and as restated for the pooling of interests
transactions are as follows:
Year Ended
December 31, 1998
------------------------------
Revenue Net Income
----------- ----------
MedQuist, as previously reported ......... $164,779(a) $ (305)(a)
DDI ...................................... 6,165(b) 253(b)
Signal ................................... 5,281(b) 543(b)
TLF ...................................... 3,688(c) 522(c)
MRC ...................................... 91,742(c) 2,172(c)
--------- ------
Restated ................................. $ 271,655 $3,185
========= ======
- ------------
(a) Includes (i) DDI and Signal amounts from July 1, 1998, (ii) TLF and MRC
amounts from October 1, 1998 and (iii) $18,221 of pre-tax transaction and
restructuring costs.
(b) Reflects amounts from January 1, 1998 to June 30, 1998.
(c) Reflects amounts from January 1, 1998 to September 30, 1998.
Year Ended
December 31, 1997
-------------------------
Revenue Net Income
----------- -----------
MedQuist, as previously reported ......... $ 84,495 $ 7,631
DDI ...................................... 10,026 616
Signal ................................... 9,294 1,100
TLF ...................................... 4,226 712
MRC ...................................... 108,117 (1,326)
--------- --------
Restated ................................. $ 216,158 $ 8,733
========= ========
F-13
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
2. ACQUISITIONS -- (Continued)
Year Ended
December 31, 1996
-------------------------
Revenue 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
========= ========
Prior to their mergers with the Company, Signal and TLF were taxed as "S"
Corporations. The above net income amounts do not include an aggregate "C"
Corporation income tax provision for Signal and TLF of approximately $637, $682
and $294 for the years ended December 31, 1996, 1997 and 1998, respectively
(see Note 1).
From 1996 through 1998, 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 will account for the payments as additional purchase price and
amortize the additional amount paid over the remaining life of the asset.
3. PROPERTY AND EQUIPMENT
December 31,
-------------------------
1997 1998
----------- -----------
Furniture, equipment and software .................... $ 46,608 $ 52,571
Leasehold improvements ............................... 1,341 1,553
--------- ---------
47,949 54,124
Less -- Accumulated depreciation and amortization .... (22,507) (27,102)
--------- ---------
$ 25,442 $ 27,022
========= =========
4. INTANGIBLE ASSETS
December 31,
-------------------------
1997 1998
----------- -----------
Goodwill ................................. $ 64,600 $ 67,109
Customer lists ........................... 21,552 22,640
Non-compete agreements ................... 3,405 3,405
Employee base ............................ 2,514 2,514
Other .................................... 137 150
-------- ---------
92,208 95,818
Less -- Accumulated amortization ......... (9,826) (13,602)
-------- ---------
$ 82,382 $ 82,216
======== =========
F-14
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
5. ACCRUED EXPENSES:
December 31,
-----------------------
1997 1998
---------- ----------
Accrued payroll and related taxes ......... $ 7,175 $ 9,329
Restructuring charges ..................... 1,733 6,775
Other ..................................... 5,710 9,746
-------- --------
$ 14,618 $ 25,850
======== ========
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
---------- -----------
<S> <C> <C>
Note payable to bank, repaid in 1998 .................................... $ 5,250 $ --
Note payable to former shareholders of Medical Records Corp.,
repaid in 1999 ......................................................... 2,000 2,000
Promissory notes, repaid or converted into common stock in 1998 ......... 5,085 --
Capital lease obligations ............................................... 1,786 468
Other ................................................................... 260 119
-------- --------
14,381 2,587
Less -- current portion ................................................. (6,792) (2,372)
-------- --------
$ 7,589 $ 215
======== ========
</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 (a) prime rate, (b) the federal funds rate plus 0.5% (c) 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 and 1998, the Company did not incur
any interest expense on the revolving credit facility, as there were no
borrowings on the credit facility. For the year ended December 31, 1996, the
Company incurred interest expense of $49 on the revolving credit facility, at a
weighted average interest rate of 9.78%. The highest outstanding borrowing
under the revolver during 1996 was $2,534.
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 totaled approximately 7.3% at December 31,
1997. The note was secured by substantially all of MRC's assets. The agreement
required the payment of interest quarterly along with equal monthly principal
payments of $117 through September 2001. The note was repaid in 1998.
F-15
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
6. LONG-TERM DEBT -- (Continued)
Also, 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. The Company repaid
these notes in 1999.
In January 1998, subordinated convertible 6% promissory notes in the
amount of $1,288 were converted into 172 shares of common stock at a conversion
price of $7.48 per share.
Long-term debt maturities as of December 31, 1998, are as follows:
1999 ................... $ 2,372
2000 ................... 138
2001 ................... 48
2002 ................... 29
-------
$ 2,587
=======
7. SHAREHOLDERS' EQUITY
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 July 1996, MRC issued shares of
preferred stock for total consideration, net of offering expenses, of $29,272.
Such preferred stock was exchanged for MedQuist common in the merger (see Note
2).
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 public 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 $0.03 per
diluted share, has been recorded as a deduction from the net income available
to common shareholders in 1996.
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 at $12.69 per share were
issued by MRC. 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. During
1998, 157 warrants were exercised and 37 were cancelled. At December 31, 1998,
no warrants were outstanding.
F-16
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
8. STOCK OPTION PLANS
The Company has six stock option plans that provide for the granting of
options to purchase 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.
In February 1998, MRC granted 165 stock options to employees with exercise
prices below the fair market value of MRC's common stock. Accordingly, MRC
recorded deferred compensation totaling $1,078, of which $540 was amortized to
expense in 1998.
Information with respect to the Company's common stock options is as
follows:
<TABLE>
<CAPTION>
Option Price Aggregate
Shares Per Share Proceeds
--------- ----------------- ------------
<S> <C> <C> <C>
Outstanding, December 31, 1995 ......... 2,407 $1.14 - $8.31 $ 7,141
Granted ............................... 1,670 2.71 - 10.48 10,810
Exercised ............................. (98) 2.17 - 5.13 (220)
Canceled .............................. (156) 2.71 - 3.17 (271)
----- ----------------- --------
Outstanding, December 31, 1996 ......... 3,823 1.14 - 10.48 17,460
Granted ............................... 1,240 5.21 - 16.49 13,345
Exercised ............................. (533) 1.56 - 10.42 (1,018)
Canceled .............................. (193) 3.17 - 8.67 (412)
----- ----------------- --------
Outstanding, December 31, 1997 ......... 4,337 1.14 - 16.49 29,375
Granted ............................... 1,015 5.21 - 31.19 26,012
Exercised ............................. (760) 1.14 - 16.49 (1,887)
Canceled .............................. (159) 5.21 - 25.63 (391)
----- ----------------- --------
Outstanding, December 31, 1998 ......... 4,433 $ 1.34 - $31.19 $ 53,109
===== ================= ========
</TABLE>
At December 31, 1998, there were 2,172 exercisable options with an
aggregate exercise price of $16,204 and 273 additional options available for
grant under the plans.
The options outstanding and exercisable by exercise price at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range Of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------------ ------------- ------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$0.00 - $3.11 463 5.9 $ 2.36 321 $ 2.20
3.12 - 6.23 845 7.0 4.56 488 4.42
6.24 - 9.35 833 5.9 8.12 650 8.17
9.36 - 12.47 935 7.4 10.48 567 10.48
12.48 - 15.59 524 9.0 14.34 144 14.26
15.60 - 18.71 11 8.8 15.90 2 15.94
18.72 - 21.83 52 9.4 21.43 -- --
21.84 - 24.95 116 9.6 23.11 -- --
24.96 - 28.06 43 9.6 25.63 -- --
28.07 - 31.18 611 9.7 31.13 -- --
--- --- -------- --- -------
4,433 7.5 $ 12.00 2,172 $ 7.46
===== === ======== ===== =======
</TABLE>
F-17
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
8. STOCK OPTION PLANS -- (Continued)
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 and net income per share
would have been the following pro forma amounts:
Year Ended December 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
Net income:
As reported ................ $ 5,288 $ 8,733 $ 3,185
Pro forma .................. 4,454 7,613 1,705
Basic net income per share:
As reported ................ .22 .28 .10
Pro forma .................. .18 .24 .05
Diluted net income per share:
As reported ................ .20 .26 .09
Pro forma .................. .17 .23 .05
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 4.5% 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,
----------------------------------
1996 1997 1998
-------- ---------- ----------
Current:
State and local ......... $ 79 $ 1,176 $ 1,596
Federal ................. 1,536 4,317 10,089
------ ------- --------
1,615 5,493 11,685
Deferred ................. 1,105 (200) (3,213)
------ ------- --------
$2,720 $ 5,293 $ 8,472
====== ======= ========
F-18
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO 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
income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Statutory federal income tax rate ....................... 34.0% 35.0% 35.0%
State income taxes, net of federal benefit .............. 3.0 3.0 3.7
Non-deductible merger costs ............................. -- -- 30.8
Impact of Signal and TLF "S" Corporation status ......... (8.0) (4.9) (4.4)
Other ................................................... 5.0 4.6 7.6
----- ----- -----
34.0% 37.7% 72.7%
===== ===== =====
</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 financial statements related to Signal and TLF's
net income prior to their mergers with the Company (see Note 1).
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 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 $5,052, which represents the tax
effect of goodwill that was recorded for income tax purposes.
The tax effected temporary differences that give rise to deferred income
taxes are as follows:
December 31,
-----------------------------
1997 1998
------------- -------------
Deferred tax asset:
Restructuring accruals ........... $ 602 $ 2,722
Carryforwards .................... 338 --
Accruals and reserves ............ 2,237 3,716
--------- ---------
$ 3,177 $ 6,438
========= =========
Deferred tax liability:
Accumulated depreciation ......... $ (1,475) $ (1,725)
Accumulated amortization ......... (3,518) 1,124
Deferred compensation ............ 210 289
Marketable security .............. -- (315)
Other ............................ (1,711) (1,354)
--------- ---------
$ (6,494) $ (1,981)
========= =========
10. COMMITMENTS AND CONTINGENCIES
Rent expense for operating leases was $5,053, $4,599 and $5,618 for the
years ended December 31, 1996, 1997 and 1998, respectively. Minimum annual
rental commitments for noncancelable operating leases having terms in excess of
one year as of December 31, 1998, are as follows:
F-19
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
10. COMMITMENTS AND CONTINGENCIES -- (Continued)
1999............................................. $ 4,857
2000............................................. 3,590
2001............................................. 2,564
2002............................................. 1,616
2003............................................. 550
2004............................................. 29
--------
$ 13,206
========
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 $544 and $457at December 31, 1997 and 1998, 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. EMPLOYEE BENEFIT PLANS
Savings Plan
The Company offers a savings plan under section 401(k) of the Internal
Revenue Code. This savings plan allows eligible employees to contribute up to
15% of their compensation on a pre-tax basis. The Company matches 50% of
participant's contribution, up to 5% of the participant's total compensation.
Effective October 1, 1996, the Company's matching contribution is made in the
form of the Company's common stock. The charge to operations for the Company's
matching contributions was $63, $80 and $125 in 1996, 1997 and 1998,
respectively. The Company issued approximately five thousand shares in both
1997 and 1998, in connection with the Company's matching contribution. The
Company did not issue shares in 1996 in connection with the savings plan.
MRC has two defined contribution 401(k) plans, covering substantially all
employees. Eligible employees of MRC may contribute certain amounts of their
annual compensation. During 1996, 1997 and 1998, MRC made matching
contributions to the plans of $171,000, $117,000 and $114,000, respectively.
Stock Purchase Plan
All full-time employees except those who own five percent or more of the
voting stock of the Company are eligible to participate in the Company's
Employee Stock Purchase Plan (SPP). The SPP provides that participants may
authorize the Company to withhold up to 10% of their earnings for the purchase
of the Company's common stock. The purchase price of the common stock is
determined by the Compensation Committee but shall not be less than eighty-five
percent of the fair market value of the common stock. Through the SPP, five and
15 shares of common stock have been purchased in 1997 and 1998, respectively.
In connection with the SPP, the Company did not issue any shares in 1996.
F-20
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands, except per share amounts)
12. QUARTERLY SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, 1997: -------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Revenue .............................. $ 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>
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, 1998: -------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Revenue .............................. $ 63,915 $ 66,870 $ 69,005 $ 71,865
Income before income taxes ........... 6,214 6,327 6,155 (7,039)
Net income ........................... 4,004 3,969 3,776 (8,564)
Basic net income per share ........... 0.12 0.12 0.12 (0.24)
Diluted net income per share ......... 0.12 0.12 0.11 (0.24)
</TABLE>
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Medquist Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Medquist, Inc. and Subsidiaries
included in this Registration Statement, and have issued our report thereon
dated February 1, 1999. Our audits were made for the purpose of forming an
opinion on those financial statements taken as a whole. The Schedule on page
S-2 is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements. This schedule has been subjected
to auditing procedures applied in the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Philadelphia, Pa.
February 1, 1999
S-1
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
beginning costs and other end of
of period expenses Accounts Write-offs Period
------------ ------------ ------------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1996 ......... $ 1,040 $ 409 $ (208) (a) $ 169 $ 1,072
Year ended December 31, 1997 ......... 1,072 812 20 606 1,298
Year ended December 31, 1998 ......... 1,298 1,217 -- 241 2,274
Accrued restructuring costs:
Year ended December 31, 1996 ......... $ 347 $ 644 $ -- $ 121 $ 870
Year ended December 31, 1997 ......... 870 2,075 (289) (b) 923 1,733
Year ended December 31, 1998 ......... 1,733 6,539 -- 1,497 6,775
</TABLE>
- ------------
(a) Amount includes the addition of $64 relating to purchase accounting
adjustment in connection with MRC's acquisition of Medical Records, Inc.
offset by a write-off of $272 relating to MedQuist's discontinued
operations.
(b) Reclassified to other long-term liabilities.
S-2
<PAGE>
UNDERWRITING
MedQuist, the selling shareholders and the underwriters for the offering
named below have entered into an underwriting agreement with respect to the
shares being offered. Subject to certain conditions, each underwriter has
severally agreed to purchase the number of shares indicated in the following
table. Goldman, Sachs & Co., BancBoston Robertson Stephens Inc., Donaldson,
Lufkin & Jenrette Securities Corporation and Volpe Brown Whelan & Company, LLC
are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
- ------------------------------------------------------------------ -----------------
<S> <C>
Goldman, Sachs & Co. .........................................
BancBoston Robertson Stephens Inc. ...........................
Donaldson, Lufkin & Jenrette Securities Corporation ..........
Volpe Brown Whelan & Company, LLC ............................
-----------------
Total .......................................................
=================
</TABLE>
------------------------------------------
If the underwriters sell more shares than the total number set forth in
the table above, the underwriters have an option to buy up to an additional
629,020 shares from MedQuist to cover such sales. They may exercise that option
for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts
and commissions to be paid to the underwriters by MedQuist and the selling
shareholders. Such amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares.
Paid by MedQuist
------------------------------
No Exercise Full Exercise
------------- --------------
Per Share $ $
Total $ $
Paid by the selling
shareholders
------------------------------
No Exercise Full Exercise
------------- --------------
Per Share $ $
Total $ $
Shares sold by the underwriters to the public will initially be offered
at the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $ per share from
the initial public offering price. If all the shares are not sold at the
initial offering price, the representatives may change the offering price and
the other selling terms.
<PAGE>
MedQuist and the selling shareholders, without the prior written consent of
Goldman, Sachs & Co., have agreed not to sell or dispose of or hedge any of
their common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 90 days after the date of this prospectus, except that MedQuist
may issue common stock upon the exercise of outstanding options or in connection
with an acquisition. This agreement does not apply to any existing employee
benefit plans.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the
U-1
<PAGE>
representatives have repurchased shares sold by or for the account of such
underwriter in stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or
otherwise affect the market price of the common stock. As a result, the price
of the common stock may be higher than the price that otherwise might exist in
the open market. If these activities are commenced, they may be discontinued by
the underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
MedQuist and the selling shareholders estimate that their shares of the
total expenses of the offerings, excluding underwriting discounts and
commissions, will be approximately $73,252 and $233,929, respectively.
MedQuist and the selling shareholders have agreed to indemnify the
several underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
U-2
<PAGE>
================================================================================
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
--------------------------------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary ....................... 3
Risk Factors ............................. 6
Forward-looking Statements................ 8
Use of Proceeds .......................... 9
Market for the Common Stock and Dividend
Policy ................................. 10
Capitalization ........................... 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................ 12
Business ................................. 17
Management ............................... 22
Description of Capital Stock ............. 24
Principal and Selling Shareholders ....... 26
U.S. Tax Consequences to Non-U.S. Holders
of Common Stock........................ 28
Legal Matters ............................ 30
Experts .................................. 30
Where You Can Find Additional Information
Index to Consolidated Financial 31
Statements ............................ F-1
Underwriting ............................. U-1
================================================================================
<PAGE>
================================================================================
4,193,467 Shares
MedQuist Inc.
Common Stock
[GRAPHIC OMITTED]
Goldman, Sachs & Co.
BancBoston
Robertson Stephens
Donaldson, Lufkin & Jenrette
Volpe Brown Whelan
& Company
Representatives of the Underwriters
================================================================================
<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 $ 37,181
NASD fee 14,000
Nasdaq fee for listing of additional shares 17,500
Legal fees and expenses 80,000
Blue Sky expenses and counsel fees 5,000
Accounting fees and expenses 76,000
Transfer agent and registrar fees 7,500
Printing and engraving fees 60,000
Miscellaneous 10,000
--------
TOTAL $307,181
========
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 MedQuist's Bylaws provides that MedQuist, to the
full extent permitted by Section 14A:3-5 of the NJBCA, shall indemnify all past
and present directors or officers of MedQuist and may indemnify all past or
present employees or other agents of MedQuist. To the extent that a director,
officer, employee or agent of MedQuist 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 MedQuist against expenses in connection therewith. Such
expenses shall be paid by MedQuist in advance of the final disposition of the
action, suit or proceeding as authorized by MedQuist's Board of Directors upon
receipt of an undertaking to repay the advance if it is ultimately determined
that such person is not entitled to indemnification.
The Company has a policy insuring it and its directors and officers
against certain liabilities, including liabilities under the Securities Act.
Reference is made to Item 17 of this Registration Statement for additional
information regarding indemnification of directors and officers.
Item 16. Exhibits
<TABLE>
<S> <C>
1.1 Underwriting Agreement
4.1 Specimen Stock Certificate (Incorporated by reference to Exhibit 4.1
to MedQuist's Registration Statement No. 333-3050 on Form S-1)
5.1 Opinion of Pepper Hamilton LLP
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Pepper Hamilton LLP (included in Exhibit 5.1)
24.1 Powers of Attorney (included on signature page)
</TABLE>
II-1
<PAGE>
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement; provided,
however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
clauses is contained in periodic reports filed with or furnished to the
Commission by MedQuist 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, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange Act)
that is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-2
<PAGE>
SIGNATURES
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 March 24, 1999.
MEDQUIST INC.
By: /s/ DAVID A. COHEN
--------------------------------------------
David A. Cohen
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints David A. Cohen and John R. Emery, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, or any registration
statement for the same offering that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on March 24,
1999 in the capacities indicated:
<TABLE>
<CAPTION>
Signatures Title
<S> <C>
/s/ David A. Cohen
- ------------------------ Chairman and Chief Executive Officer (principal executive officer)
David A. Cohen
/s/ John R. Emery Senior Vice President, Treasurer and Chief Financial Officer (principal
- ------------------------ financial officer and principal accounting officer)
John R. Emery
/s/ John A. Donohoe, Jr. President, Chief Operating Officer and Director
- ------------------------
John A. Donohoe, Jr.
/s/ Bruce K. Anderson Director
- ------------------------
Bruce K. Anderson
/s/ William T. Carson, Jr. Director
- -------------------------
William T. Carson, Jr.
/s/ John T. Casey Director
- ------------------------
John T. Casey
/s/ Richard J. Censits Director
- ------------------------
Richard J. Censits
/s/ James R. Emshoff Director
- ------------------------
James R. Emshoff
</TABLE>
II-3
<PAGE>
Signatures Title
/s/ Terrence J. Mulligan Director
- ------------------------
Terrence J. Mulligan
/s/ A. Fred Ruttenberg Director
- ------------------------
A. Fred Ruttenberg
Director
- ------------------------
Edward L. Samek
/s/ R. Timothy Stack Director
- ------------------------
R. Timothy Stack
/s/ Richard H. Stowe Director
- ------------------------
Richard H. Stowe
/s/ John H. Underwood Director
- ------------------------
John H. Underwood
II-4
<PAGE>
EXHIBIT 1.1
MedQuist Inc.
Common Stock
(no par value)
---------------------------
Underwriting Agreement
April....., 1999
Goldman, Sachs & Co.,
BancBoston Robertson Stephens,
Donaldson, Lufkin & Jenrette,
Volpe Brown Whelan & Company,
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
MedQuist Inc., a New Jersey corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
. . . . . . shares and, at the election of the Underwriters, up to . . . . . .
additional shares of Common Stock, no par value ("Stock") of the Company and the
shareholders of the Company named in Schedule II hereto (the "Selling
Shareholders") propose, subject to the terms and conditions stated herein, to
sell to the Underwriters an aggregate of . . . . . . . shares of Stock. The
aggregate of . . . . shares to be sold by the Company and the Selling
Shareholders is herein called the "Firm Shares" and the aggregate of . . . . . .
additional shares to be sold by the Company is herein called the "Optional
Shares". The Firm Shares and the Optional Shares that the Underwriters elect to
purchase pursuant to Section 2 hereof are herein collectively called the
"Shares".
1. (a) The Company represents and warrants to, and agrees with, each
of the Underwriters that:
(i) A registration statement on Form S-3 (File No. 333-....) (the
"Initial Registration Statement") in respect of the Shares has been
filed with the Securities and Exchange Commission (the "Commission");
the Initial Registration Statement and any post-effective amendment
thereto, each in the form heretofore delivered, and, excluding
1
<PAGE>
exhibits thereto but including all documents incorporated by
reference in the prospectus contained therein, to you for each of the
other Underwriters, have been declared effective by the Commission in
such form; other than a registration statement, if any, increasing
the size of the offering (a "Rule 462(b) Registration Statement"),
filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended (the "Act"), which became effective upon filing, no other
document with respect to the Initial Registration Statement or
document incorporated by reference therein has heretofore been filed
with the Commission; and no stop order suspending the effectiveness
of the Initial Registration Statement, any post-effective amendment
thereto or the Rule 462(b) Registration Statement, if any, has been
issued and to the Company's knowledge no proceeding for that purpose
has been initiated or threatened by the Commission (any preliminary
prospectus included in the Initial Registration Statement or filed
with the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission under the Act is hereinafter called a
"Preliminary Prospectus"; the various parts of the Initial
Registration Statement and the Rule 462(b) Registration Statement, if
any, including all exhibits thereto and including (i) the information
contained in the form of final prospectus filed with the Commission
pursuant to Rule 424(b) under the Act in accordance with Section 5(a)
hereof and deemed by virtue of Rule 430A under the Act to be part of
the Initial Registration Statement at the time it was declared
effective and (ii) the documents incorporated by reference in the
prospectus contained in the Initial Registration Statement at the
time such part of the Initial Registration Statement became
effective, each as amended at the time such part of the Initial
Registration Statement became effective or such part of the Rule
462(b) Registration Statement, if any, became or hereafter becomes
effective, are hereinafter collectively called the "Registration
Statement"; such final prospectus, in the form first filed pursuant
to Rule 424(b) under the Act, is hereinafter called the "Prospectus";
any reference herein to any Preliminary Prospectus or the Prospectus
shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-3 under the Act, as
of the date of such Preliminary Prospectus or Prospectus, as the case
may be; any reference to any amendment or supplement to any
Preliminary Prospectus or the Prospectus shall be deemed to refer to
and include any documents filed after the date of such Preliminary
Prospectus or Prospectus, as the case may be, under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and
incorporated by reference in such Preliminary Prospectus or
Prospectus, as the case may be; and any reference to any amendment to
the Registration Statement shall be deemed to refer to and include
any annual report of the Company filed pursuant to Section 13(a) or
15(d) of the Exchange Act after the effective date of the Initial
Registration Statement that is incorporated by reference in the
Registration Statement;
2
<PAGE>
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, (a) conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and (b) did not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in
reliance upon and in conformity with information furnished in writing
to the Company by an Underwriter through Goldman, Sachs & Co.
expressly for use therein or by a Selling Shareholder expressly for
use in the preparation of the answers therein to Item 7 of Form S-3;
(iii) The documents incorporated by reference in the Prospectus,
when they became effective or were filed with the Commission, as the
case may be, conformed in all material respects to the requirements
of the Act or the Exchange Act as applicable, and the rules and
regulations of the Commission thereunder, and none of such documents
contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make
the statements therein not misleading at the time they were filed or
became effective; and any further documents so filed and incorporated
by reference in the Prospectus or any further amendment or supplement
thereto, when such documents become effective or are filed with the
Commission, as the case may be, will conform in all material respects
to the requirements of the Act or the Exchange Act, as applicable,
and the rules and regulations of the Commission thereunder and (a) if
part of the Registration Statement, will not contain an untrue
statement of material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading and (b) if not part of the Registration Statement, will
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary, in light of
the circumstance under which they are made, to make the statements
therein not misleading; provided, however, that this representation
and warranty shall not apply to any statements or omissions made in
reliance upon and in conformity with information furnished in writing
to the Company by an Underwriter through Goldman, Sachs & Co.
expressly for use therein;
(iv) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement
or the Prospectus will conform, in all material respects to the
requirements of the Act and the rules and regulations of the
3
<PAGE>
Commission thereunder and (a) the Registration Statement does not and
will not, as of its applicable effective date as to the Registration
Statement and any amendment thereto contain an untrue statement of
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading
and (b) the Prospectus and any amendment or supplement thereto as of
its applicable filing date does not and will not, contain an untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements, in
light of the circumstance under which they were made, therein not
misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the
Company by an Underwriter through Goldman, Sachs & Co. expressly for
use therein or by a Selling Shareholder expressly for use in the
preparation of the answers therein to Item 7 of Form S-3;
(v) Neither the Company nor any of its subsidiaries has
sustained since the date of the latest audited financial statements
included or incorporated by reference in the Prospectus any material
loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus; and,
since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been any
change in the capital stock or long-term debt of the Company or any
of its subsidiaries or any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the general affairs, management, financial position,
shareholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the
Prospectus;
(vi) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable
title to all personal property owned by them, in each case free and
clear of all liens, encumbrances and defects except such as are
described in the Prospectus or such as do not materially affect the
value of such property and do not materially interfere with the use
made and proposed to be made of such property by the Company and its
subsidiaries and any real property and buildings held under lease by
the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company and its
subsidiaries;
4
<PAGE>
(vii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of New Jersey, with power and authority (corporate and other)
to own its properties and conduct its business as described in the
Prospectus, and has been duly qualified as a foreign corporation for
the transaction of business and is in good standing under the laws of
each other jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification, or is
subject to no liability or disability by reason of the failure to be
so qualified in any such jurisdiction that would have a material
adverse effect on the current or future consolidated financial
position, shareholders equity or results of operations of the Company
and its Subsidiaries (a "Material Adverse Effect"); and each
subsidiary of the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation;
(viii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of
the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and conform to the description of the
Stock contained in the Prospectus; and all of the issued shares of
capital stock of each subsidiary of the Company have been duly and
validly authorized and issued, are fully paid and non-assessable and
(except for directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims;
(ix) All issued and outstanding shares of Stock of the Company
(including the Shares to be sold by the selling Shareholders) have
been issued in compliance with all federal and state securities laws,
were not issued in violation of or subject to any preemptive rights
or other rights to subscribe for or purchase securities granted by
the Company or the result of agreements or arrangements by which the
Company is bound, and the authorized and outstanding capital Stock of
the Company as of December 31, 1998 is as set forth in the Prospectus
under the caption "Capitalization" and conforms in all material
respects to the statements relating thereto contained in the
Registration Statement and the Prospectus (and such statements
correctly state the substance of the instruments defining the
capitalization of the Company); the Shares to be sold by the Company
have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement and, when issued and delivered by the
Company against payment therefor in accordance with the terms of this
Agreement, will be duly and validly issued and fully paid and
nonassessable, and will be sold to the Underwriters free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable
5
<PAGE>
interest; and no preemptive right, co-sale right, registration right,
right of first refusal or other similar right of shareholders exists
with respect to any of the Shares or the issuance and sale thereof.
No further approval or authorization of any shareholder, the Board of
Directors of the Company or others is required for the issuance and
sale or transfer of the Shares to be sold by the Company except as
may be required under the Act, the Exchange Act or under state or
other securities or Blue Sky laws. All issued and outstanding shares
of capital stock of each subsidiary of the Company have been duly
authorized and validly issued and are fully paid and nonassessable,
and were not issued in violation of or subject to any preemptive
right, or other rights to subscribe for or purchase shares and are
owned by the Company free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest. Except as
disclosed in the Prospectus and the financial statements of the
Company, and the related notes thereto, included in the Prospectus,
neither the Company nor any subsidiary has outstanding any options to
purchase, or any preemptive rights or other rights to subscribe for
or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital
stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option, stock
bonus and other stock plans or arrangements, and the options or other
rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown
with respect to such plans, arrangements, options and rights.
(x) The issue and sale of the Shares to be sold by the Company
and the compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions herein
contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement
or other material agreement or instrument to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of
the Company or any of its subsidiaries is subject, nor will such
action result in any violation of the provisions of the Articles of
Incorporation or By-laws of the Company or any of its subsidiaries or
any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or
any of its subsidiaries or any of their properties; and no consent,
approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for
the issue and sale of the Shares or the consummation by the Company
of the transactions contemplated by this Agreement, except the
registration under the Act of the Shares and such consents,
approvals, authorizations, registrations or qualifications as may be
required under state securities or Blue Sky laws in connection with
the purchase and distribution of the Shares by the Underwriters;
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(xi) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in
default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture,
mortgage, deed of trust, loan agreement, material lease or other
material agreement or instrument to which it is a party or by which
it or any of its properties may be bound;
(xii) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock and under the caption
"Certain Federal Tax Considerations for Non-United States Holders of
Common Stock", insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, complete
and fair;
(xiii) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any property of the
Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect; and,
to the best of the Company's knowledge, no such proceedings are
threatened by governmental authorities or threatened by others;
(xiv) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company",
as such term is defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act");
(xv) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located
in Cuba within the meaning of Section 517.075, Florida Statutes;
(xvi) Arthur Anderson LLP, which has audited certain financial
statements of the Company and its subsidiaries, are independent
accountants within the meaning of the Act and the rules and
regulations of the Commission thereunder; the audited consolidated
financial statements of the Company, together with the related
schedules and notes, forming part of the Registration Statement and
Prospectus, fairly present in all material respects the financial
position and the results of operations of the Company and its
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subsidiaries at the respective dates and for the respective periods
to which they apply; and all audited consolidated financial
statements of the Company, together with the related schedule and
notes, forming part of the Registration Statement and Prospectus,
have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved and
except as may be otherwise stated therein. The selected and summary
financial and statistical data included in the Registration Statement
present fairly the information shown therein and have been compiled
on a basis consistent with the audited financial statements referred
to above. No other financial statements or schedules are required to
be included in the Registration Statement.
(xvii) The Company has reviewed its operations and that of its
subsidiaries and any third parties with which the Company or any of
its subsidiaries has a material relationship to evaluate the extent
to which the business or operations of the Company or any of its
subsidiaries will be affected by the Year 2000 Problem. As a result
of such review, the Company has no reason to believe, and does not
believe, except as described in the Prospectus, that the Year 2000
Problem will have a Material Adverse Effect or result in any material
loss or interference with the Company's business or operations. The
"Year 2000 Problem" as used herein means any significant risk that
computer hardware or software used in the receipt, transmission,
processing, manipulation, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or electrical
systems of any kind will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as effectively
as in the case of dates or time periods occurring prior to January 1,
2000.
(xviii) The Company and its subsidiaries have timely filed all
necessary federal, state and foreign income and franchise tax returns
and have paid all taxes shown thereon as due, and there is no tax
deficiency that has been or, to the best of the Company's knowledge,
might be asserted against the Company or any of its subsidiaries that
might have a Material Adverse Effect; and all tax liabilities are
adequately provided for on the books of the Company and its
subsidiaries.
(xix) The Company and its subsidiaries maintain insurance with
insurers of recognized financial responsibility of the types and in
the amounts generally deemed adequate for their respective businesses
including, but not limited to, insurance covering real and personal
property owned or leased by the Company or its subsidiaries against
theft, damage, destruction, acts of vandalism and all other risks
8
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customarily insured against, including "tail insurance" covering
medical incidents for certain discontinued operations all of which
insurance is in full force and effect; neither the Company nor any of
its subsidiaries has been refused any insurance coverage sought or
applied for; and neither the Company nor any of its subsidiaries has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a Material
Adverse Effect.
(xx) To the best of Company's knowledge, no organized labor
disturbance by the employees or independent contractors (including,
without limitation, its medical transcriptionists) of the Company or
any of its subsidiaries exists or is imminent that would have a
Material Adverse Effect. No collective bargaining agreement exists
with any of the Company's employees or independent contractors
(including, without limitation, its medical transcriptionists) and,
to the best of the Company's knowledge, no such agreement is
imminent.
(xxi) Each of the Company and its subsidiaries owns or possesses
adequate rights to use all patents, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names and
copyrights which are necessary to conduct its businesses as described
in the Registration Statement and Prospectus; the expiration of any
patents, patent rights, trade secrets, trademarks, service marks,
trade names or copyrights would not have a Material Adverse Effect;
the Company has not received any notice of, and has no knowledge of,
any infringement of or conflict with asserted rights of the Company
by others with respect to any patent, patent rights, inventions,
trade secrets, know-how, trademarks, service marks, trade names or
copyrights; and the Company has not received any notice of, and has
no knowledge of, any infringement of or conflict with asserted rights
of others by the Company or any of its subsidiaries with respect to
any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling
or finding, might have a Material Adverse Effect.
(xxii) Each of the Company and its subsidiaries is in possession
of all authorizations, licenses, certificates, consents, orders and
permits from state, federal and other regulatory authorities which
are material to the conduct of its business as currently conducted or
proposed to be conducted, all of which are valid and in full force
and effect in all material respects. The Company and its subsidiaries
are operating in compliance with, all such licenses, certificates,
authorizations, approvals, permits, franchises, orders and consents
9
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and no event has occurred which allows, or after notice or lapse of
time would allow, revocation or termination thereof or result in any
impairment of the rights of the holder thereof, except to the extent
that any such non-compliance, revocation, termination or impairment
would not have a Material Adverse Effect. No such licenses,
certificates, authorizations, approvals, permits, franchises, orders
or consents contain any restrictions that have or may have a Material
Adverse Effect.
(xxiii) The Stock is registered pursuant to Section 12(g) of the
Exchange Act and is listed for quotation on the National Association
of Securities Dealers Automated Quotations National Market System
("Nasdaq") and the Company has taken no action designed to, or likely
to have the effect of, terminating the registration of the Stock
under the Exchange Act or delisting the Stock from the Nasdaq nor has
the Company received any notification that the Commission or the
National Association of Securities Dealers, Inc. (the "NASD") is
contemplating terminating such registration or listing.
(xxiv) The Company has not distributed and will not distribute
prior to the later of (a) the Closing Date and (b) completion of the
distribution of the Shares, any offering material in connection with
the offering and sale of the Shares other than any Preliminary
Prospectuses, the Prospectus, the Registration Statement and other
materials, if any, permitted by the Act.
(xxv) Neither the Company nor any of its subsidiaries has at
anytime during the last five (5) years (a) made any unlawful
contribution to any candidate for foreign office or failed to
disclose fully any contribution in violation of law, or (b) made any
payment to any federal or state governmental officer or official, or
other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(xxvi) Neither the Company nor any of its subsidiaries has taken
or will take, directly or indirectly, any action designed to or that
might reasonably be expected to cause or result in stabilization or
manipulation of the price of the to facilitate the sale or resale of
the Shares.
(xxvii) Each officer and director of the Company listed in Annex
I hereto has agreed in writing with each of the Underwriters and the
Company that during the period beginning from the date hereof and
continuing to and including the date 90 days after the date of the
Prospectus, such officer or director will not, except as provided
hereunder, offer, sell contract to sell or otherwise dispose of, or
enter into any agreement or arrangement that has the effect of
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transferring the economic effects of holding, any securities of the
Company that are substantially similar to the Shares, including but
not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or
any such substantially similar securities without the written consent
of Goldman, Sachs & Co. Furthermore, such persons have also agreed
and consented to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of the Securities held
by such person except in compliance with this restriction. The
Company has provided to counsel for the Underwriters true, accurate
and complete copies of all of the agreements pursuant to which its
officers, directors and shareholders have agreed to such or similar
restrictions (the "Lock-up Agreements") presently in effect or
effected hereby.
(xxviii) The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide
reasonable assurances that (a) transactions are executed in
accordance with management's general or specific authorizations, (b)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets, (c) access to
assets is permitted only in accordance with management's general or
specific authorization, and (d) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxix) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of
any of the officers or directors of the Company or any of the members
of the families of any of them that are required to be disclosed in
the Registration Statement or the Prospectus and are not disclosed in
the Registration Statement and the Prospectus.
(xxx) To the best of the Company's knowledge, no officer,
director or security holder of the Company has an "association" or
"affiliation" with any member of the NASD, within the meaning of
Article III, Section 44 of the Rules of Fair Practice of the NASD.
The Company does not have an "association" or "affiliation" with any
member of the NASD, within the meaning of Article III, Section 44 of
the Rules of Fair Practice of the NASD.
(xxxi) This Agreement has been duly authorized, executed and
delivered by the Company.
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(b) Each of the Selling Shareholders severally represents and
warrants to, and agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders necessary
for the execution and delivery by such Selling Shareholder of this
Agreement and the Power of Attorney and the Custody Agreement
hereinafter referred to, and for the sale and delivery of the Shares
to be sold by such Selling Shareholder hereunder, have been obtained;
and such Selling Shareholder has full right, power and authority to
enter into this Agreement, the Power-of-Attorney and the Custody
Agreement and to sell, assign, transfer and deliver the Shares to be
sold by such Selling Shareholder hereunder;
(ii) The sale of the Shares to be sold by such Selling
Shareholder hereunder and the compliance by such Selling Shareholder
with all of the provisions of this Agreement, the Power of Attorney
and the Custody Agreement and the consummation of the transactions
herein and therein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, any statute, indenture, mortgage, deed of
trust, loan agreement or other material agreement or instrument to
which such Selling Shareholder is a party or by which such Selling
Shareholder is bound or to which any of the property or assets of
such Selling Shareholder is subject, nor will such action result in
any violation of the provisions of or any statute or any order, rule
or regulation of any court or governmental agency or body having
jurisdiction over such Selling Shareholder or the property of such
Selling Shareholder;
(iii) Such Selling Shareholder has, and immediately prior to
each Time of Delivery (as defined in Section 4 hereof) such Selling
Shareholder will have, good and valid title to the Shares to be sold
by such Selling Shareholder hereunder, free and clear of all liens,
encumbrances, equities or claims; and, upon delivery of such Shares
and payment therefor pursuant hereto, good and valid title to such
Shares, free and clear of all liens, encumbrances, equities or
claims, will pass to the several Underwriters;
(iv) During the period beginning from the date hereof and
continuing to and including the date 90 days after the date of the
Prospectus, not to offer, sell contract to sell or otherwise dispose
of, or enter into any agreement or arrangement that has the effect of
transferring the economic effects of holding, except as provided
hereunder, any securities of the Company that are substantially
similar to the Shares, including but not limited to any securities
that are convertible into or exchangeable for, or that represent the
right to receive, Stock or any such substantially similar securities
without your prior written consent;
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(v) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result
in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares;
(vi) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto are made in reliance upon and in
conformity with written information furnished to the Company by such
Selling Shareholder expressly for use therein, such Preliminary
Prospectus and the Registration Statement did, and the Prospectus and
any further amendments or supplements to the Registration Statement
and the Prospectus, when they become effective or are filed with the
Commission, as the case may be, will conform in all material respects
to the requirements of the Act and the rules and regulations of the
Commission thereunder and will not contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading;
(vii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Shareholder will deliver to you prior to
or at the Time of Delivery (as hereinafter defined) a properly
completed and executed United States Treasury Department Form W-9 (or
other applicable form or statement specified by Treasury Department
regulations in lieu thereof);
(viii) Certificates in negotiable form representing all of the
Shares to be sold by such Selling Shareholder hereunder have been
placed in custody under a Custody Agreement, in the form heretofore
furnished to you (the "Custody Agreement"), duly executed and
delivered by such Selling Shareholder to [Name of Custodian], as
custodian (the "Custodian"), and such Selling Shareholder has duly
executed and delivered a Power of Attorney, in the form heretofore
furnished to you (the "Power of Attorney"), appointing the persons
indicated in Schedule II hereto, and each of them, as such Selling
Shareholder's attorneys-in-fact (the "Attorneys-in-Fact") with
authority to execute and deliver this Agreement on behalf of such
Selling Shareholder, to determine the purchase price to be paid by
the Underwriters to the Selling Shareholders as provided in Section 2
hereof, to authorize the delivery of the Shares to be sold by such
Selling Shareholder hereunder and otherwise to act on behalf of such
Selling Shareholder in connection with the transactions contemplated
by this Agreement and the Custody Agreement; and
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(ix) The Shares represented by the certificates held in custody
for such Selling Shareholder under the Custody Agreement are subject
to the interests of the Underwriters hereunder; the arrangements made
by such Selling Shareholder for such custody, and the appointment by
such Selling Shareholder of the Attorneys-in-Fact by the Power of
Attorney, are to that extent irrevocable; the obligations of the
Selling Shareholders hereunder shall not be terminated by operation
of law, whether by the death or incapacity of any individual Selling
Shareholder or, in the case of an estate or trust, by the death or
incapacity of any executor or trustee or the termination of such
estate or trust, or in the case of a partnership or corporation, by
the dissolution of such partnership or corporation, or by the
occurrence of any other event; if any individual Selling Shareholder
or any such executor or trustee should die or become incapacitated,
or if any such estate or trust should be terminated, or if any such
partnership or corporation should be dissolved, or if any other such
event should occur, before the delivery of the Shares hereunder,
certificates representing the Shares shall be delivered by or on
behalf of the Selling Shareholders in accordance with the terms and
conditions of this Agreement and of the Custody Agreements; and
actions taken by the Attorneys-in-Fact pursuant to the Powers of
Attorney shall be as valid as if such death, incapacity, termination,
dissolution or other event had not occurred, regardless of whether or
not the Custodian, the Attorneys-in-Fact, or any of them, shall have
received notice of such death, incapacity, termination, dissolution
or other event.
2. Subject to the terms and conditions herein set forth, (a) the
Company and each of the Selling Shareholders agree, severally and not jointly,
to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company and each of the Selling
Shareholders, at a purchase price per share of $.............., the number of
Firm Shares (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying the aggregate number of Firm Shares to be sold by the
Company and each of the Selling Shareholders as set forth opposite their
respective names in Schedule II hereto by a fraction, the numerator of which is
the aggregate number of Firm Shares to be purchased by such Underwriter as set
forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the aggregate number of Firm Shares to be purchased by
all of the Underwriters from the Company and all of the Selling Shareholders
hereunder and (b) in the event and to the extent that the Underwriters shall
exercise the election to purchase Optional Shares as provided below, the Company
14
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agrees to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at the purchase price
per share set forth in clause (a) of this Section 2, that portion of the number
of Optional Shares as to which such election shall have been exercised (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
such number of Optional Shares by a fraction the numerator of which is the
maximum number of Optional Shares which such Underwriter is entitled to purchase
as set forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the maximum number of Optional Shares that all of the
Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase
at their election up to . . . . . . Optional Shares, at the purchase price per
share set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement and
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares,
the several Underwriters propose to offer the Firm Shares for sale upon the
terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company and the Selling Shareholders shall be delivered by or on
behalf of the Company and the Selling Shareholders to Goldman, Sachs & Co.,
through the facilities of the Depository Trust Company ("DTC"), for the account
of such Underwriter, against payment by or on behalf of such Underwriter of the
purchase price therefor by wire transfer of Federal (same-day) funds to the
account specified by the Company and each of the Selling Shareholders, as their
interests may appear, to Goldman, Sachs & Co. at least forty-eight hours in
advance. The Company will cause the certificates representing the Shares to be
made available for checking and packaging at least twenty-four hours prior to
the Time of Delivery (as defined below) with respect thereto at the office of
DTC or its designated custodian (the "Designated Office"). The time and date of
such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m.,
New York time, on April ...., 1999 or such other time and date as Goldman, Sachs
& Co., the Company and the Selling Stockholders may agree upon in writing, and,
with respect to the Optional Shares, 9:30 a.m., New York time, on the date
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specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs
& Co. of the Underwriters' election to purchase such Optional Shares, or such
other time and date as Goldman, Sachs & Co. and the Company may agree upon in
writing. Such time and date for delivery of the Firm Shares is herein called the
"First Time of Delivery", such time and date for delivery of the Optional
Shares, if not the First Time of Delivery, is herein called the "Second Time of
Delivery", and each such time and date for delivery is herein called a "Time of
Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(k) hereof, will be delivered at the offices
of Sullivan & Cromwell, 125 Broad Street, New York, New York, 10004 (the
"Closing Location"), and the Shares will be delivered at the Designated Office,
all at such Time of Delivery. A meeting will be held at the Closing Location at
4:30 p.m., New York City time, on the New York Business Day next preceding such
Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Section 4, "New York Business Day"
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a
day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later
than the Commission's close of business on the second business day
following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Act; to make no further amendment or any supplement to the
Registration Statement or Prospectus prior to the last Time of
Delivery which shall be disapproved by you promptly after reasonable
notice thereof; to advise you, promptly after it receives notice
thereof, of the time when any amendment to the Registration Statement
has been filed or becomes effective or any supplement to the
Prospectus or any amended Prospectus has been filed and to furnish
you with copies thereof; to file on a timely basis all reports and
any definitive proxy or information statements required to be filed
by the Company with the Commission pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of the
Prospectus and for so long as the delivery of a prospectus is
required in connection with the offering or sale of the Shares; to
advise you, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order
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preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Shares for
offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request
by the Commission for the amending or supplementing of the
Registration Statement or Prospectus or for additional information;
and, in the event of the issuance of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or
prospectus or suspending any such qualification, promptly to use its
best efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under
the securities laws of such jurisdictions as you may request and to
comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be
necessary to complete the distribution of the Shares, provided that
in connection therewith the Company shall not be required to qualify
as a foreign corporation or to file a general consent to service of
process in any jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time
to time, to furnish the Underwriters with copies of the Prospectus in
New York City in such quantities as you may reasonably request, and,
if the delivery of a prospectus is required at any time prior to the
expiration of nine months after the time of issue of the Prospectus
in connection with the offering or sale of the Shares and if at such
time any events shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of
the circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be
necessary during such period to amend or supplement the Prospectus or
to file under the Exchange Act any document incorporated by reference
in the Prospectus in order to comply with the Act or the Exchange
Act, to notify you and upon your request to file such document and to
prepare and furnish without charge to each Underwriter and to any
dealer in securities as many copies as you may from time to time
reasonably request of an amended Prospectus or a supplement to the
Prospectus which will correct such statement or omission or effect
such compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at any time
nine months or more after the time of issue of the Prospectus, upon
your request but at the expense of such Underwriter, to prepare and
deliver to such Underwriter as many copies as you may request of an
amended or supplemented Prospectus complying with Section 10(a)(3) of
the Act;
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(d) To make generally available to its securityholders as soon
as practicable, but in any event not later than eighteen months after
the effective date of the Registration Statement (as defined in Rule
158(c) under the Act), an earning statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a)
of the Act and the rules and regulations of the Commission thereunder
(including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date 90 days after the date of the
Prospectus, not to offer, sell, contract to sell or otherwise dispose
of, or enter into any agreement or arrangement that has the effect of
transferring the economic effects of holding, any securities of the
Company that are substantially similar to the Shares, including but
not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or
any such substantially similar securities without the prior written
consent of Goldman, Sachs & Co. except pursuant to employee benefit
plans in effect on the date hereof and in connection with
acquisitions or as otherwise provided hereunder;
(f) To furnish to its shareholders as soon as practicable after
the end of each fiscal year an annual report (including a balance
sheet and statements of income, shareholders, equity and cash flows
of the Company and its consolidated subsidiaries certified by
independent public accountants) and, as soon as practicable after the
end of each of the first three quarters of each fiscal year
(beginning with the fiscal quarter ending after the effective date of
the Registration Statement), to make available to its shareholders
consolidated summary financial information of the Company and its
subsidiaries for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or
other communications (financial or other) furnished to shareholders
and to deliver to you (i) as soon as they are available, copies of
any reports and financial statements furnished to or filed with the
Commission or any national securities exchange on which any class of
securities of the Company is listed; and (ii) such additional
information concerning the business and financial condition of the
Company as you may from time to time reasonably request (such
financial statements to be on a consolidated basis to the extent the
accounts of the Company and its subsidiaries are consolidated in
reports furnished to its shareholders generally or to the
Commission);
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(h) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the
Prospectus under the caption "Use of Proceeds"; and
(i) To use its best efforts to qualify for quotation the Shares
to be sold by the Company on the Nasdaq.
6. The Company and each of the Selling Shareholders covenant and
agree with one another and with the several Underwriters that (a) the Company
and such Selling Shareholder will pay or cause to be paid a pro rata share
(based on the number of Shares to be sold by the Company and such Selling
Shareholder hereunder) of the following: (i) the fees, disbursements and
expenses of the Company's counsel and accountants in connection with the
registration of the Shares under the Act and all other expenses in connection
with the preparation, printing and filing of the Registration Statement, any
Preliminary Prospectus and the Prospectus and amendments and supplements thereto
and the mailing and delivering of copies thereof to the Underwriters and
dealers; (ii) the cost of printing or producing any Agreement among
Underwriters, this Agreement, the Blue Sky Memorandum, closing documents
(including any compilations thereof) and any other documents in connection with
the offering, purchase, sale and delivery of the Shares; (iii) all expenses in
connection with the qualification of the Shares for offering and sale under
state securities laws as provided in Section 5(b) hereof, including the fees and
disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky survey (iv) all fees and
expenses in connection with listing the Shares on the Nasdaq; (v) all fees and
expenses incurred by the Company in connection with the marketing of the Shares;
and (vi) the filing fees incident to, and the fees and disbursements of counsel
for the Underwriters in connection with, securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of the
Shares; (b) the Company will pay or cause to be paid: (i) the cost of preparing
stock certificates; (ii) the cost and charges of any transfer agent or registrar
and (iii) all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided for in this
Section; and (c) such Selling Shareholder will pay or cause to be paid all costs
and expenses incident to the performance of such Selling Shareholder's
obligations hereunder which are not otherwise specifically provided for in this
Section, including (i) any fees and expenses of counsel for such Selling
Shareholder, (ii) such Selling Shareholder's pro rata share of the fees and
expenses of the Attorneys-in-Fact and the Custodian, and (iii) all expenses and
taxes incident to the sale and delivery of the Shares to be sold by such Selling
Shareholder to the Underwriters hereunder. In connection with clause (c) (iii)
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of the preceding sentence, Goldman, Sachs & Co. agrees to pay New York State
stock transfer tax, and the Selling Shareholder agrees to reimburse Goldman,
Sachs & Co. for associated carrying costs if such tax payment is not rebated on
the day of payment and for any portion of such tax payment not rebated. It is
understood, however, that the Company shall bear, and the Selling Shareholders
shall not be required to pay or to reimburse the Company for, the cost of any
other matters not directly relating to the sale and purchase of the Shares
pursuant to this Agreement, and that, except as provided in this Section, and
Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and
expenses, including the fees of their counsel, stock transfer taxes on resale of
any of the Shares by them, and any advertising expenses connected with any
offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Shareholders herein are, at and as of such Time
of Delivery, true and correct, the condition that the Company and the Selling
Shareholders shall have performed all of its and their obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed
for such filing by the rules and regulations under the Act and in
accordance with Section 5(a) hereof; if the Company has elected to
rely upon Rule 462(b), the Rule 462(b) Registration Statement shall
have become effective by 10:00 P.M., Washington, D.C. time, on the
date of this Agreement; no stop order suspending the effectiveness of
the Registration Statement or any part thereof shall have been issued
and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional
information on the part of the Commission shall have been complied
with to your reasonable satisfaction;
(b) Sullivan & Cromwell, counsel for the Underwriters, shall
have furnished to you such written opinion or opinions (a draft of
each such opinion is attached as Annex II-A hereto), dated such Time
of Delivery, with respect to the matters covered in paragraphs (i),
(ii), (vii), (xi), (xiii) and (xiv) of subsection (c) below as well
as such other related matters as you may reasonably request, and such
counsel shall have received such papers and information as they may
reasonably request to enable them to pass upon such matters;
(c) Pepper Hamilton LLP, counsel for the Company, shall have
furnished to you their written opinion (a draft of such opinion is
attached as Annex II-B hereto), dated such Time of Delivery, in form
and substance satisfactory to you, to the effect that:
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(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of New Jersey, with power and authority (corporate and other)
to own its properties and conduct its business as described in the
Prospectus;
(ii) The Company has an authorized capitalization as set forth
in the Prospectus, and the Shares conform to the description of the
Stock contained in the Prospectus;
(iii) To the best of such counsel's knowledge and other than as
set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries
is a party or of which any property of the Company or any of its
subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, would individually or in the
aggregate have a material adverse effect on the current or future
consolidated financial position, shareholders' equity or results of
operations of the Company and its subsidiaries; and, to the best of
such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(iv) This Agreement has been duly authorized, executed and
delivered by the Company;
(v) The issue and sale of the Shares being delivered at such
Time of Delivery to be sold by the Company and the compliance by the
Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not
conflict with or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, any of the
agreements or other documents listed as an exhibit to the
Registration Statement, nor will such action result in any violation
of the provisions of the Certificate of Incorporation or By-laws of
the Company or any statute or any order, rule or regulation known to
such counsel of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of
their properties;
(vi) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or
body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement, except the registration under
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the Act of the Shares, and such consents, approvals, authorizations,
registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
(vii) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock and, under the caption
"Certain Federal Tax Considerations for Non-United States Holders of
Common Stock", insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, complete
and fair;
(viii) The Company is not an "investment company", as such term
is defined in the Investment Company Act;
(ix) The documents incorporated by reference in the Prospectus
or any further amendment or supplement thereto made by the Company
prior to such Time of Delivery (other than the financial statements
and related schedules therein and statistical data, as to which such
counsel need express no opinion), when they became effective or were
filed with the Commission, as the case may be, complied as to form in
all material respects with the requirements of the Act or the
Exchange Act, as applicable and the rules and regulations of the
Commission thereunder; and they have no reason to believe that any of
such documents, when such documents became effective or were so
filed, as the case may be, contained, in the case of a registration
statement which became effective under the Act, an untrue statement
of a material fact, or omitted to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, or, in the case of other documents which were filed under
the Exchange Act with the Commission, an untrue statement of a
material fact or omitted to state a material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made when such documents were so filed, not
misleading; and
(x) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related schedules therein and statistical data, as to which such
counsel need express no opinion) comply as to form in all material
respects with the requirements of the Act and the rules and
regulations thereunder; although they do not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus,
except for those
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<PAGE>
referred to in the opinion in subsection (xi) of this Section 7(c),
such counsel shall further state they have no reason to believe that,
as of its effective date, the Registration Statement or any further
amendment thereto made by the Company prior to such Time of Delivery
(other than the financial statements and related schedules therein
and statistical data, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that, as of its
date, the Prospectus or any further amendment or supplement thereto
made by the Company prior to such Time of Delivery (other than the
financial statements and related schedules therein and statistical
data, as to which such counsel need express no opinion) contained an
untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as
of such Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules therein and statistical data, as to
which such counsel need express no opinion) contains an untrue
statement of a material fact or omits to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and they do
not know of any amendment to the Registration Statement required to
be filed or of any contracts or other documents of a character
required to be filed as an exhibit to the Registration Statement or
required to be incorporated by reference into the Prospectus or
required to be described in the Registration Statement or the
Prospectus which are not filed or incorporated by reference or
described as required;
(d) John M. Suender, Senior Vice President, General Counsel and
Secretary of the Company, shall have furnished to you their written
opinion (a draft of such opinion is attached as Annex II-C hereto), dated
such Time of Delivery, in form and substance satisfactory to you, to the
effect that:
(i) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company (including the Shares being delivered at such Time of
Delivery) have been duly and validly authorized and issued and are
fully paid and non-assessable;
(ii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such
qualification, or is subject to no liability or disability by
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<PAGE>
reason of the failure to be so qualified in any such jurisdiction
that would have a material adverse effect on the current or future
consolidated financial position, shareholders' equity or results of
operations of the Company and its Subsidiaries (such counsel being
entitled to rely in respect of the opinion in this clause upon
opinions of local counsel and in respect of matters of fact upon
certificates of officers of the Company, provided that such counsel
shall state that they believe that both you and they are justified in
relying upon such opinions and certificates);
(iii) Each subsidiary of the Company has been duly incorporated
and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation; and all of the issued
shares of capital stock of each such subsidiary have been duly and
validly authorized and issued, are fully paid and non-assessable, and
(except for directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims (such counsel being entitled to rely in respect of
the opinion in this clause upon opinions of local counsel and in
respect of matters of fact upon certificates of officers of the
Company or its subsidiaries, provided that such counsel shall state
that they believe that both you and they are justified in relying
upon such opinions and certificates);
(iv) The real property leased by the Company at Five Greentree
Centre, Marlton, New Jersey is held by the Company under a valid,
subsisting and enforceable lease with such exceptions as are not
material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company and its
subsidiaries;
(v) To the best of such counsel's knowledge and other than as
set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries
is a party or of which any property of the Company or any of its
subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, would individually or in the
aggregate have a material adverse effect on the current or future
consolidated financial position shareholders' equity or results of
operations of the Company and its subsidiaries; and, to the best of
such counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(vi) This Agreement has been duly authorized, executed and
delivered by the Company;
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(vii) The issue and sale of the Shares being delivered at such
Time of Delivery to be sold by the Company and the compliance by the
Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not
conflict with or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other material agreement
or instrument known to such counsel to which the Company or any of
its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of
the Company or any of its subsidiaries is subject, nor will such
action result in any violation of the provisions of the Certificate
of Incorporation or By-laws of the Company or any statute or any
order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the Company or
any of its subsidiaries or any of their properties;
(viii) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in
default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture,
mortgage, deed of trust, loan agreement, or material lease or
material agreement or other instrument to which it is a party or by
which it or any of its properties may be bound;
(ix) The documents incorporated by reference in the Prospectus
or any further amendment or supplement thereto made by the Company
prior to such Time of Delivery (other than the financial statements
and related schedules therein, as to which such counsel need express
no opinion), when they became effective or were filed with the
Commission, as the case may be, complied as to form in all material
respects with the requirements of the Act or the Exchange Act, as
applicable and the rules and regulations of the Commission
thereunder; and they have no reason to believe that any of such
documents, when such documents became effective or were so filed, as
the case may be, contained, in the case of a registration statement
which became effective under the Act, an untrue statement of a
material fact, or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or, in the case of other documents which were filed under
the Exchange Act with the Commission, an untrue statement of a
material fact or omitted to state a material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made when such documents were so filed, not
misleading;
(x) The Registration Statement and the Prospectus and any further
amendments and supplements thereto made by the Company prior to such
25
<PAGE>
Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of
the Act and the rules and regulations thereunder; although they do
not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or
the Prospectus, except for those referred to in the opinion in
subsection (xi) of this Section 7(c), such counsel shall further
state they have no reason to believe that, as of its effective date,
the Registration Statement or any further amendment thereto made by
the Company prior to such Time of Delivery (other than the financial
statements and related schedules therein, as to which such counsel
need express no opinion) contained an untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or
that, as of its date, the Prospectus or any further amendment or
supplement thereto made by the Company prior to such Time of Delivery
(other than the financial statements and related schedules therein,
as to which such counsel need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as
of such Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules therein, as to which such counsel
need express no opinion) contains an untrue statement of a material
fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which
they were made, not misleading; and they do not know of any amendment
to the Registration Statement required to be filed or of any
contracts or other documents of a character required to be filed as
an exhibit to the Registration Statement or required to be
incorporated by reference into the Prospectus or required to be
described in the Registration Statement or the Prospectus which are
not filed or incorporated by reference or described as required;
(e) The respective counsel for each of the Selling Shareholders, as
indicated in Schedule II hereto, each shall have furnished to you their
written opinion with respect to each of the Selling Shareholders for whom
they are acting as counsel (a draft of each such opinion is attached as
Annex II-D hereto), dated the First Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) A Power-of-Attorney and a Custody Agreement have been duly
executed and delivered by such Selling Shareholder and constitute
valid and binding agreements of such Selling Shareholder in
accordance with their terms;
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(ii) This Agreement has been duly executed and delivered by or
on behalf of such Selling Shareholder; and the sale of the Shares to
be sold by such Selling Shareholder hereunder and the compliance by
such Selling Shareholder with all of the provisions of this
Agreement, the Power-of-Attorney and the Custody Agreement and the
consummation of the transactions herein and therein contemplated will
not conflict with or result in a breach or violation of any terms or
provisions of, or constitute a default under, any statute, indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which such Selling Shareholder is
a party or by which such Selling Shareholder is bound or to which any
of the property or assets of such Selling Shareholder is subject, nor
will such action result in any violation of the provisions of or any
order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over such Selling
Shareholder or the property of such Selling Shareholder;
(iii) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation of
the transactions contemplated by this Agreement in connection with
the Shares to be sold by such Selling Shareholder hereunder, except
such consents, approvals, authorizations or orders which have been
duly obtained and are in full force and effect, such as have been
obtained under the Act and such as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of such Shares by the Underwriters;
(iv) Immediately prior to the First Time of Delivery, such
Selling Shareholder had good and valid title to the Shares to be sold
at the Time of Delivery by such Selling Shareholder under this
Agreement, free and clear of all liens, encumbrances, equities or
claims, and full right, power and authority to sell, assign, transfer
and deliver the Shares to be sold by such Selling Shareholder
hereunder; and
(v) Good and valid title to such Shares, free and clear of all
liens, encumbrances, equities or claims, has been transferred to each
of the several Underwriters who have purchased such Shares in good
faith and without notice of any such lien, encumbrance, equity or
claim or any other adverse claim within the meaning of the Uniform
Commercial Code.
In rendering the opinion in paragraph (iv), such counsel may rely
upon a certificate of such Selling Shareholder in respect of matters of fact as
to ownership of, and liens, encumbrances, equities or claims on, the Shares sold
by such Selling Shareholder, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such certificate;
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(f) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of
any post-effective amendment to the Registration Statement filed
subsequent to the date of this Agreement and also at the Time of Delivery,
Arthur Anderson LLP shall have furnished to you a letter or letters, dated
the respective dates of delivery thereof, in form and substance
satisfactory to you, to the effect set forth in Annex III-A hereto (the
executed copy of the letter delivered prior to the execution of this
Agreement is attached as Annex III-B hereto and a draft of the form of
letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery is
attached as Annex III-C hereto);
(g) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included or incorporated by reference in the Prospectus any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective
dates as of which information is given in the Prospectus there shall not
have been any change in the capital stock or long-term debt of the Company
or any of its subsidiaries or any change, or any development involving a
prospective change, in or affecting the general affairs, management,
financial position, shareholders' equity or results of operations of the
Company and its subsidiaries, otherwise than as set forth or contemplated
in the Prospectus, the effect of which, in any such case described in
clause (i) or (ii), is in the judgment of the Representatives so material
and adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being delivered at such Time
of Delivery on the terms and in the manner contemplated in the Prospectus;
(h) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on the Nasdaq; (ii)
a suspension or material limitation in trading in the Company's securities
on the Nasdaq; (iii) a general moratorium on commercial banking activities
declared by either Federal or New York State authorities; or (iv) the
outbreak or escalation of hostilities involving the United States or the
declaration by the United States of a national emergency or war, if the
effect of any such event specified in this clause (iv) in the judgment of
the Representatives makes it impracticable or inadvisable to proceed with
the public offering or the delivery of the Shares being delivered at such
Time of Delivery on the terms and in the manner contemplated in the
Prospectus;
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(i) The Shares at such Time of Delivery shall have been duly listed
for quotation on Nasdaq;
(j) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
(k) The Company and the Selling Shareholders shall have furnished or
caused to be furnished to you at such Time of Delivery certificates of
officers of the Company and of the Selling Shareholders, respectively,
satisfactory to you as to the accuracy of the representations and
warranties of the Company and the Selling Shareholders, respectively,
herein at and as of such Time of Delivery, as to the performance by the
Company and the Selling Shareholders of all of their respective
obligations hereunder to be performed at or prior to such Time of
Delivery, and as to such other matters as you may reasonably request, and
the Company shall have furnished or caused to be furnished certificates as
to the matters set forth in subsections (a) and (f) of this Section.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) Each of [insert names of appropriate Selling Shareholders], will
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue
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statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by such
Selling Shareholder expressly for use therein; and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that such Selling
Shareholder shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through Goldman, Sachs &
Co. expressly for use therein.
(c) Each Underwriter will indemnify and hold harmless the Company and
each Selling Shareholder against any losses, claims, damages or liabilities to
which the Company or such Selling Shareholder may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company and each Selling
Shareholder for any legal or other expenses reasonably incurred by the Company
or such Selling Shareholder in connection with investigating or defending any
such action or claim as such expenses are incurred.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but
30
<PAGE>
the omission so to notify the indemnifying party shall not relieve it from any
liability which it may have to any indemnified party otherwise than under such
subsection. In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate therein and, to the
extent that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and, after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under such subsection for any legal expenses of other counsel or any other
expenses, in each case subsequently incurred by such indemnified party, in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the written consent of the
indemnified party, effect the settlement or compromise of, or consent to the
entry of any judgment with respect to, any pending or threatened action or claim
in respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified party is an actual or potential party to such
action or claim) unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability arising out of
such action or claim and (ii) does not include a statement as to or an admission
of fault, culpability or a failure to act, by or on behalf of any indemnified
party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Shareholders on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (d) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company and the Selling Shareholders on the one hand
and the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Shareholders on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Shareholders bear to the total
31
<PAGE>
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or the Selling Shareholders on the one hand or the Underwriters on the other and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company, each of the
Selling Shareholders and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (e) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (e) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(f) The obligations of the Company and the Selling Shareholders under
this Section 8 shall be in addition to any liability which the Company and the
respective Selling Shareholders may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company and to each person, if
any, who controls the Company or any Selling Shareholder within the meaning of
the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company
32
<PAGE>
and the Selling Shareholders shall be entitled to a further period of thirty-six
hours within which to procure another party or other parties satisfactory to you
to purchase such Shares on such terms. In the event that, within the respective
prescribed periods, you notify the Company and the Selling Shareholders that you
have so arranged for the purchase of such Shares, or the Company and the Selling
Shareholders notify you that they have so arranged for the purchase of such
Shares, you or the Company and the Selling Shareholders shall have the right to
postpone such Time of Delivery for a period of not more than seven days, in
order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall include
any person substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company
and the Selling Shareholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Shareholders shall have the right to require
each non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company
and the Selling Shareholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all of the Shares to be purchased at such Time of Delivery,
or if the Company and the Selling Shareholders shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the Optional Shares) shall
thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company or the Selling Shareholders, except for the expenses
to be borne by the Company and the Selling Shareholders and the
33
<PAGE>
Underwriters as provided in Section 6 hereof and the indemnity and contribution
agreements in Section 8 hereof; but nothing herein shall relieve a defaulting
Underwriter from liability for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company, the Selling Shareholders and the
several Underwriters, as set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement, shall remain in full force and
effect, regardless of any investigation (or any statement as to the results
thereof) made by or on behalf of any Underwriter or any controlling person of
any Underwriter, or the Company, or any of the Selling Shareholders, or any
officer or director or controlling person of the Company, or any controlling
person of any Selling Shareholder, and shall survive delivery of and payment for
the Shares.
11. If this Agreement shall be terminated pursuant to Section 9
hereof, neither the Company nor the Selling Shareholders shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof; but,
if for any other reason any Shares are not delivered by or on behalf of the
Company and the Selling Shareholders as provided herein, the Company and each of
the Selling Shareholders pro rata (based on the number of Shares to be sold by
the Company and such Selling Shareholder hereunder) will reimburse the
Underwriters through you for all out-of-pocket expenses approved in writing by
you, including fees and disbursements of counsel, reasonably incurred by the
Underwriters in making preparations for the purchase, sale and delivery of the
Shares, but the Company and the Selling Shareholders shall then be under no
further liability to any Underwriter in respect of the Shares not so delivered
except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you [jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives]; and in all dealings with any Selling Shareholder hereunder,
you and the Company shall be entitled to act and rely upon any statement,
request, notice or agreement on behalf of such Selling Shareholder made or given
by any or all of the Attorneys-in-Fact for such Selling Shareholder.
All statements, requests, notices and agreements hereunder shall be
in writing, and if to the Underwriters shall be delivered or sent by mail or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 9th Floor, New York, New York 10005, Attention: Registration
Department; if to any Selling Shareholder shall be delivered or sent by mail or
facsimile transmission to counsel for such Selling Shareholder at its address
set forth in Schedule II hereto; and if to the
34
<PAGE>
Company shall be delivered or sent by mail or facsimile transmission to the
address of the Company set forth in the Registration Statement, Attention:
Secretary; provided, however, that any notice to an Underwriter pursuant to
Section 8(c) hereof shall be delivered or sent by mail or facsimile transmission
to such Underwriter at its address set forth in its Underwriters' Questionnaire
constituting such Questionnaire, which address will be supplied to the Company
or the Selling Shareholders by you on request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and the Selling Shareholders and, to
the extent provided in Sections 8 and 10 hereof, the officers and directors of
the Company and each person who controls the Company, any Selling Shareholder or
any Underwriter, and their respective heirs, executors, administrators,
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Time shall be of the essence of this Agreement. As used herein,
the term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please
sign and return to us one for the Company and each of the Representatives plus
one for each counsel and the Custodian, if any counterparts hereof, and upon the
acceptance hereof by you, on behalf of each of the Underwriters, this letter and
such acceptance hereof shall constitute a binding agreement among each of the
Underwriters, the Company and each of the Selling Shareholders. It is understood
that your acceptance of this letter on behalf of each of the Underwriters is
pursuant to the authority set forth in a form of Agreement among Underwriters,
the form of which shall be submitted to the Company and the Selling Shareholders
for examination, upon request, but without warranty on your part as to the
authority of the signers thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
35
<PAGE>
Any person executing and delivering this Agreement as
Attorney-in-Fact for a Selling Shareholder represents by so doing that he has
been duly appointed as Attorney-in-Fact by such Selling Shareholder pursuant to
a validly existing and binding Power-of-Attorney which authorizes such
Attorney-in-Fact to take such action.
Very truly yours,
MEDQUIST INC.
By: ...................................
Name:
Title:
[Names of Selling Shareholders]
By: ...................................
Name:
Title:
As Attorney-in-Fact acting
on behalf of each of the
Selling Shareholders named
in Schedule II to this
Agreement.
Accepted as of the date hereof:
Goldman, Sachs & Co.
BancBoston Robertson Stephens
Donaldson, Lufkin & Jenrette
Volpe Brown Whelan & Company
By:
...................................
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
36
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Optional Shares
Total Number of to be Purchased
Firm Shares if Maximum
Underwriter to be Purchased Option Exercised
----------- --------------- ----------------
<S> <C> <C>
Goldman, Sachs & Co...............................................
BancBoston Robertson Stephens.....................................
Donaldson, Lufkin & Jenrette......................................
Volpe Brown Whelan & Company......................................
[Names of other underwriters].....................................
--------------- ---------------
Total.................................................. =============== ===============
</TABLE>
37
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
Number of
Optional Shares to
Total Number be Sold
of Firm Shares if Maximum
Underwriter to be Sold Option Exercised
----------- ---------- ----------------
<S> <C> <C>
The Company..........................................................
The Selling Shareholder(s):.....................................
[Name of Selling Shareholder](a)]...........................
[Name of Selling Shareholder](b)]...........................
[Name of Selling Shareholder](c)]...........................
[Name of Selling Shareholder](d)]...........................
[Name of Selling Shareholder](e)]...........................
--------------- ---------------
Total..................................................... =============== ===============
</TABLE>
- ------------------
(a) This Selling Shareholder is represented by [Name and Address of Counsel] and
has appointed [Names of Attorneys-in-Fact (not less than two)], and each of
them, as the Attorneys-in-Fact for such Selling Shareholder.
(b) This Selling Shareholder is represented by [Name and Address of Counsel] and
has appointed [Names of Attorneys-in-Fact (not less than two)], and each of
them, as the Attorneys-in-Fact for such Selling Shareholder.
(c) This Selling Shareholder is represented by [Name and Address of Counsel] and
has appointed [Names of Attorneys-in-Fact (not less than two)], and each of
them, as the Attorneys-in-Fact for such Selling Shareholder.
38
<PAGE>
(d) This Selling Shareholder is represented by [Name and Address of Counsel] and
has appointed [Names of Attorneys-in-Fact (not less than two)], and each of
them, as the Attorneys-in-Fact for such Selling Shareholder.
(e) This Selling Shareholder is represented by [Name and Address of Counsel] and
has appointed [Names of Attorneys-in-Fact (not less than two)], and each of
them, as the Attorneys-in-Fact for such Selling Shareholder.
39
<PAGE>
Exhibit 5.1
March 24, 1999
MedQuist Inc.
Five Greentree Centre
Suite 311
Marlton, NJ 08053
Re: Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as special counsel to MedQuist Inc., a New
Jersey corporation (the "Company"), in connection with the registration under
the Securities Act of 1933, as amended (the "Act") of a public offering (the
"Offering") of up to 4,193,467 shares (the "Primary Shares") of the Company's
Common Stock, no par value (the "Common Stock"), to be sold by the Company and
by certain shareholders of the Company (the "Selling Shareholders"), and up to
an additional 629,020 shares of Common Stock (the "Additional Shares" and,
together with the Primary Shares, the "Shares") subject to an over-allotment
option which may be sold by the Company.
The opinion is delivered in accordance with the requirements
of Item 601(b)(5) of Regulation S-K under the Act.
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of (i) the Registration Statement on Form S-3
originally filed under the Act with the Securities and Exchange Commission (the
"Commission") on March 24, 1999; (ii) the form of underwriting agreement, filed
as Exhibit 1 to the Registration Statement (the "Underwriting Agreement"), to be
entered into by and among the Company, the Selling Shareholders and Goldman,
Sachs & Co., Bancboston Robertson Stevens, Donaldson, Lufkin & Jenrette, and
Volpe Brown Whelan & Company (the "Underwriters"); (iii) the Company's
Certificate of Incorporation and By-Laws, as in effect on the date hereof; (iv)
certain resolutions of the Board of Directors of the Company relating to, among
other things, the issuance of the Shares; (v) a specimen certificate
representing the shares of Common Stock; and (vi) such other documents as we
have deemed necessary or appropriate as a basis for the opinions set forth
below.
In our examination, we have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as certified or photostatic copies and the
<PAGE>
Page 2
March 24, 1999
authenticity of the originals of such latter documents. As to any facts material
to the opinions expressed herein which were not independently established or
verified, we have relied upon statements and representations of officers and
other representatives of the Company, the Selling Shareholders and others. In
addition, we have assumed the conformity of the certificates representing the
Shares to the form of the specimen thereof examined by us and the due execution
and delivery of such certificates.
This opinion is limited to the laws of the State of New Jersey
and the Federal laws of the United States of America.
Based upon and subject to the foregoing, we are of the opinion
that:
1. When (i) the Board of Directors of the Company authorizes
the price per Primary Share, (ii) the duly appointed officers of the Company and
the Selling Shareholders execute and deliver the Underwriting Agreement and
(iii) the Primary Shares are issued and delivered against payment therefor in
accordance with the terms of the Underwriting Agreement, the Primary Shares will
be duly authorized, validly issued, fully paid and nonassessable.
2. When the Company delivers the Additional Shares against
payment therefor in accordance with the terms of the Underwriting Agreement, the
Additional Shares will be duly authorized, validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to this firm under the
caption "Legal Opinions" in the prospectus filed as part of the Registration
Statement. In giving such consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Act or the
Rules and Regulations promulgated thereunder.
<PAGE>
Page 3
March 24, 1999
This opinion is furnished by us, as special counsel to the
Company, in connection with the filing of the Registration Statement and, except
as provided in the immediately preceding paragraph, is not to be used,
circulated, quoted or otherwise referred to for any other purpose without our
express written permission or relied upon by any other person.
Very truly yours,
/s/ Pepper Hamilton LLP
---------------------------
PEPPER HAMILTON LLP
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, PA
March 23, 1999
<PAGE>
EXHIBIT 23.2
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 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 to all references to our Firm included in or made part of
this registration statement.
/s/ ARTHUR ANDERSEN LLP
Cleveland, Ohio,
March 23, 1999
