<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
--------------------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period Commission file number
ended September 30, 1999 0-19941
MedQuist Inc.
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(Exact name of registrant as specified in its charter)
New Jersey 22-2531298
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Five Greentree Centre, Suite 311, Marlton, NJ 08053
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(Address of principal executive offices) (Zip Code)
(609) 596-8877
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 35,907,083 shares of
common stock, no par value, as of November 10, 1999.
<PAGE>
MedQuist Inc.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1999 (Unaudited) and
December 31, 1998 1
Consolidated Statements of Income for the nine months ended September 30, 1999 2
and 1998 (Unaudited)
Consolidated Statements of Income for the three months ended September 30, 1999
and 1998 (Unaudited) 3
Consolidated Statements of Cash Flows for the nine months ended September 30, 1999
and 1998 (Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 16
Special Note Concerning Forward Looking Statements 16
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 18
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</TABLE>
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 68,284 $ 15,936
Accounts receivable, net of allowance of $5,008 and $2,274 72,601 52,477
Prepaid expenses and other current assets 7,099 6,671
--------- ---------
Total current assets 147,984 75,084
Property and equipment - net 29,109 27,022
Other assets 1,644 2,989
Intangible assets - net 113,849 82,216
--------- ---------
$ 292,586 $ 187,311
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 138 $ 2,372
Accounts payable 6,187 5,010
Accrued expenses 51,781 25,850
--------- ---------
Total current liabilities 58,106 33,232
Long-term debt 110 215
Other liabilities 402 697
Deferred income taxes 798 1,981
Shareholders' equity:
Common stock, no par value, 60,000 shares authorized,
35,906 and 33,258 issued and outstanding -- --
Additional paid-in capital 190,537 136,603
Retained earnings 42,631 14,536
Unrealized gain on marketable security 351 585
Deferred compensation (349) (538)
--------- ---------
Total shareholders' equity 233,170 151,186
--------- ---------
$ 292,586 $ 187,311
========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1999 1998
---- ----
<S> <C> <C>
Revenue $241,643 $199,790
-------- --------
Costs and expenses:
Cost of revenue 176,409 154,739
Selling, general and administrative 9,009 12,124
Depreciation 8,570 9,466
Amortization of intangible assets 3,636 2,794
Write off IPO Costs -- 682
Non-recurring transaction costs -- 1,500
-------- --------
Total operating expenses 197,624 181,305
-------- --------
Operating income 44,019 18,485
Other income:
Gain on sale of securities 309 --
Interest income 1,168 211
-------- --------
Income before income taxes 45,496 18,696
Income tax provision 18,579 6,948
-------- --------
Net income $ 26,917 $ 11,748
======== ========
Basic net income per common share $ 0.77 $ 0.36
======== ========
Diluted net income per common share $ 0.74 $ 0.34
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
---- ----
<S> <C> <C>
Revenue $86,001 $69,005
------- -------
Costs and expenses:
Cost of revenue 60,724 53,304
Selling, general and administrative 2,851 4,072
Depreciation 3,081 3,310
Amortization of intangible assets 1,601 936
Write Off of Aborted IPO Costs -- 682
Non-Recurring Transaction Costs -- 750
------- -------
Total Operating Expenses 68,257 63,054
------- -------
Operating income 17,744 5,951
Other income:
Gain on sale of securities -- --
Interest 718 204
------- -------
Income before income taxes 18,462 6,155
Income tax provision 7,476 2,379
------- -------
Net income $10,986 $ 3,776
======= =======
Basic net income per common share $ 0.31 $ 0.12
======= =======
Diluted net income per common share $ 0.29 $ 0.11
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
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MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net income $ 26,917 $ 11,748
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 12,206 12,260
Gain on sale of securities (309) --
Changes in assets and liabilities:
Accounts receivable, net (13,544)
Prepaid expenses and other current assets (210)
Other assets 994 551
Accounts payable 1,036 (898)
Accrued payroll 5,133 (1,162)
Accrued expenses 18,313 10,791
Other liabilities (295) (379)
-------- --------
Net cash provided by operating activities 50,241 27,051
-------- --------
Investing activities:
Purchases of property and equipment, net (8,826) (10,947)
Purchase of investments (472) --
Sale of investments, net -- 4,003
Proceeds from sale of securities 781 --
Acquisitions, net of cash acquired (37,487) (5,940)
-------- --------
Net cash used in investing activities (46,004) (12,884)
-------- --------
Financing activities:
Repayments of long-term debt (2,745) (6,073)
Proceeds from common stock offering, net 41,858 --
Proceeds from the exercise of common stock options and warrants 9,217 3,632
Dividends to former shareholders (219) (1,008)
-------- --------
Net cash provided by (used in) financing activities 48,111 (3,449)
-------- --------
Net increase in cash and cash equivalents 52,348 10,718
Cash and cash equivalents, beginning of period 15,936 14,489
-------- --------
Cash and cash equivalents, end of period $ 68,284 $ 25,207
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest $ 106 $ 467
======== ========
Income taxes $ 5,629 $ 5,006
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
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MedQuist Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited - dollars in thousands, except per share amounts)
Note 1. Basis of Presentation
The information set forth in these statements is unaudited. The
information reflects all adjustments, that, in the opinion of management, are
necessary to present a fair statement of operations of MedQuist Inc. (the
"Company"), and its consolidated subsidiaries for the periods indicated. Results
of operations for the interim periods ended September 30, 1999 are not
necessarily indicative of the results of operations for the full year. Certain
information in footnote disclosures normally included in financial statements
have been condensed or omitted in accordance with the rules and regulations of
the Securities and Exchange Commission.
From 1995 through September 30, 1999, MedQuist completed 23
acquisitions, of which 17 were accounted for as purchase transactions and six
were accounted for as pooling of interests (see Note 2). The pooling of
interests transactions, all of which occurred in 1998 and 1999, include the
acquisitions of Digital Dictation, Inc. ("DDI"), Signal Transcription Network,
Inc. ("Signal"), Transcriptions Ltd. of Florida, Inc. ("TLF") and The MRC Group,
Inc. ("MRC") which were material. Accordingly, the accompanying financial
statements have been restated to reflect these acquisitions accounted for under
the pooling of interests method.
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 were recognized in 1998 in accordance with
Emerging Issues Task Force ("EIFT") 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 exist 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 September 30, 1999, $1,205 of severance
had been paid and $651 of other restructuring costs had been paid. The
consolidated balance sheet at September 30, 1999 reflects $4,683 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
5
<PAGE>
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 was approximately $705 for
the disposal of assets and approximately $800 in severance and employee contract
buy outs. The balance was primarily related to non-cancelable lease costs. The
severance costs were attributable to eight individuals from various levels of
operational and senior management. At September 30, 1999 approximately $1,025
related to MRC's restructuring charge is included in accrued expenses.
Note 2. Acquisitions
During 1998, MedQuist completed one acquisition accounted for using the
purchase method and one immaterial acquisition accounted for using the
pooling-of-interest method. Pro forma information is not presented as the
acquisitions were not material to MedQuist.
In May 1998, MedQuist completed the acquisition of Digital Dictation,
Inc. issuing 912 shares in exchange for all DDI shares. The acquisition was
accounted for using the pooling of interests method of accounting. Accordingly,
MedQuist's historical financial statements were retroactively restated to
reflect the combination with Digital Dictation, Inc.
In August 1998, MedQuist completed the acquisition of Signal
Transcription Network, Inc., issuing 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 acquisition was accounted for using the pooling of
interests method of accounting. Accordingly, MedQuist's historical financial
statements have been restated to reflect the combination with Signal
Transcription Network, Inc. Signal and MedQuist elected to treat their merger as
an asset purchase for income tax purposes.
In November 1998, MedQuist completed the acquisition of Transcriptions,
Ltd. of Florida issuing 800 shares of its common stock for all Transcriptions,
Ltd. of Florida capital stock. The acquisition was accounted for using the
pooling of interests method of accounting. Accordingly, MedQuist's consolidated
financial statements have been restated to reflect the combination with
Transcriptions Ltd. of Florida.
On December 10, 1998, MedQuist completed the acquisition of The MRC
Group, Inc. 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 MedQuist common stock. In total, MedQuist issued 8,662 shares of its
common stock to the former MRC option holders 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, MedQuist's consolidated
financial statements have been restated to reflect the merger with MRC.
6
<PAGE>
During 1999, MedQuist completed three acquisitions accounted for using
the purchase method and one immaterial acquisition accounted for using the
pooling-of-interest method. On May 31, 1999 MedQuist completed the purchase of
the assets of the medical transcription unit of Lanier Professional Services,
Inc. For the Fiscal year end June 30, 1998, the medical transcription unit of
Lanier Professional Services, Inc. had revenues of approximately $25 million.
Pro forma information is not presented as the acquisitions were not material to
MedQuist.
Note 3. Net Income Per Common Share
Basic net income per share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding for the period.
Diluted net income per share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding for the period,
adjusted for the dilutive effective of common stock equivalents, which consist
of stock options, using the treasury stock method.
The table below sets forth the reconciliation of the numerators and
denominators of the basic and diluted net income per share computations:
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------------------------------------------------------------
1999 1998
---------------------------------------- ---------------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic $10,986 35,864 $0.31 $ 3,776 32,969 $0.12
Effect of dilutive
Securities -- 1,577 (0.02) -- 1,877 (0.01)
------- ------- ----- ------- ------- -----
Diluted $10,986 37,441 $0.29 $ 3,776 34,846 $0.11
======= ======= ===== ======= ======= =====
Nine Months Ended September 30,
-------------------------------------------------------------------------------------
1999 1998
--------------------------------------- --------------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic $26,917 34,876 $0.77 $11,748 32,373 $0.36
Effect of dilutive
Securities -- 1,691 (0.03) -- 2,212 ($0.02)
------- ------- ----- ------- ------- -----
Diluted $26,917 36,567 $0.74 $11,748 34,585 $0.34
======= ======= ===== ======= ======= =====
</TABLE>
7
<PAGE>
Note 4. Shareholders' Equity
On June 15, 1998, the Company effected a two for one stock split for
all shares of common stock. All share and per share amounts have been restated
for the stock split.
On April 29, 1999, the Securities and Exchange Commission declared
effective a registration statement relating to the sale of 4,493 shares of
MedQuist common stock at a price of $33.625 per share. Of the 4,493 shares
offered, 800 were sold by MedQuist and 3,693 were sold by existing shareholders.
The net proceeds of the 800 shares sold by MedQuist totaled $25,641, net of
underwriting commissions and offering expenses.
On May 12, 1999, the underwriters exercised their overallotment option
for the purchase of 505 shares of common stock from the Company at the offering
price of $33.625 per share. The net proceeds of the overallotment option totaled
$16,217.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
We are the leading national provider of medical transcription services,
a key component in the provision of healthcare 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.
Results of Operations
The following table sets forth for the periods indicated, certain financial data
in the Company's Unaudited Consolidated Statements of Operations as a percentage
of net revenue:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
---------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue ............................. 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenue ................... 73.0 77.4 70.6 77.2
Selling, general and administrative 3.7 6.1 3.3 5.9
Depreciation ...................... 3.6 4.7 3.6 4.8
Amortization of intangible assets . 1.5 1.4 1.9 1.4
Write Off IPO Costs ............... -- 0.3 -- 1.0
Non-recurring transaction costs.... -- 0.8 -- 1.1
----- ----- ----- ---
Operating income .................. 18.2 9.3 20.6 8.6
Other income (expense) .............. 0.6 .1 0.9 0.3
----- ----- ----- ---
Income before income taxes .......... 18.8 9.4 21.5 8.9
Income tax provision ................ 7.7 3.5 8.7 3.4
----- ----- ----- ---
Net income .......................... 11.1% 5.9% 12.8% 5.5%
===== ===== ===== ===
</TABLE>
Nine Months Ended September 30, 1999
Revenue. Revenue increased 21.0% from $199.8 million for the nine months ended
September 30, 1998 to $241.6 million for the comparable 1999 period. The
increase resulted from increased sales to existing customers, sales to new
customers and additional revenue from acquisitions.
9
<PAGE>
Cost of Revenue. Cost of revenue increased 14.0% from $154.7 million for the
nine months ended September 30, 1998 to $176.4 million for the comparable 1999
period and was directly related to the increase in revenue. As a percentage of
revenues, cost of revenues decreased from 77.4% for the nine months ended
September 30, 1998 to 73.0% for the comparable 1999 period. The percentage
decrease in cost of revenues primarily resulted from cost reductions associated
from eliminating excess operational administrative support areas of MedQuist and
MRC, and the consolidation of duplicative facilities.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 25.7% from $12.1 million for the nine months ended September
30, 1998 to $9.0 million for the comparable 1999 period. As a percentage of
revenues, selling, general and administrative expenses decreased from 6.1% for
the nine months ended September 30, 1998 to 3.7% for the comparable 1999 period.
The decrease was due primarily to administrative staff reductions made in
association with the merger with MRC, and our ability to spread the fixed
portion of our overhead over a larger revenue base.
Depreciation. Depreciation expense decreased 9.5% from $9.5 million for the nine
months ended September 30, 1998 to $8.6 million for the comparable 1999 period.
As a percentage of revenues, depreciation decreased from 4.7% for the nine
months ended September 30, 1998 to 3.6% for the comparable period in 1999. The
decrease resulted from certain capital assets becoming fully depreciated late in
1998.
Amortization. Amortization of intangible assets was $2.8 million for the nine
months ended September 30, 1998 as compared to $3.6 million for the comparable
1999 period. The increase is attributable to the amortization of intangible
assets associated with the Company's acquisitions which were accounted for using
the purchase method in 1998 and 1999.
Interest. We had interest income of $211,000 for the nine months ended September
30, 1998 and interest income of $1.2 million for the comparable 1999 period.
Transaction Costs and Restructuring Charges. For the nine months ended September
30, 1988, we incurred $1.5 million of transaction costs associated with pooling
of interests business combinations and incurred $682,000 of transaction costs
related to MRC's terminated initial public offering.
In December 1998, our board of directors approved a restructuring plan
associated with the MRC acquisition. In connection with 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 September 30, 1999, $1.2
million of the employee severance and $651,000 in other restructuring costs had
been paid. At September 30, 1999, $4.7 million was included in accrued expenses
relating to the 1998 restructuring charge.
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 September 30,
1999, $1.0 million related to closed facility leases remained in accrued
expenses.
10
<PAGE>
Three Months Ended September 30, 1999
Revenue. Revenue increased 24.6% from $69.0 million for the three months ended
September 30, 1998 to $86.0 million for the comparable 1999 period. The increase
resulted from increased sales to existing customers, sales to new customers and
additional revenue from acquisitions.
Cost of Revenue. Cost of revenue increased 13.9% from $53.3 million for the
three months ended September 30, 1998 to $60.7 million for the comparable 1999
period and was directly related to the increase in revenue. As a percentage of
revenues, cost of revenues decreased from 77.2% in the third quarter of 1998 to
70.6% for the comparable 1999 period. The percentage decrease in cost of
revenues primarily resulted from cost reductions associated from eliminating
excess operational administrative support areas and the consolidation of
duplicative facilities following the December 1998 merger of MedQuist and MRC.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 30.0% from $4.1 million for the three months ended September
30, 1998 to $2.9 million for the comparable 1999 period. As a percentage of
revenues, selling, general and administrative expenses decreased from 5.9% in
the third quarter of 1998 to 3.3% for the comparable 1999 period. The decrease
was due primarily to administrative staff reductions made in association with
the merger with MRC, and our ability to spread the fixed portion of our overhead
over a larger revenue base.
Depreciation. Depreciation expense decreased 6.9% from $3.3 million for the
three months ended September 30, 1998 to $3.1 million for the comparable 1999
period. As a percentage of revenues, depreciation decreased from 4.8% in the
third quarter of 1998 to 3.6% for the comparable period in 1999. The decrease
resulted from certain capital assets becoming fully depreciated late in 1998.
Amortization. Amortization of intangible assets was $936,000 for the three
months ended September 30, 1998 as compared to $1.6 million for the comparable
1999 period. The increase is attributable to the amortization of intangible
assets associated with the Company's acquisitions which were accounted for using
the purchase method in 1998 and 1999.
Interest. We had interest income of $204,000 for the three months ended
September 30, 1998 and interest income of $718,000 for the comparable 1999
period.
Transaction Costs. For the three months ended September 30, 1998, we incurred
$750,000 of transaction costs associated with the pooling of interests business
combinations and incurred $682,000 of transaction costs related to MRC's
terminated initial public offering.
Liquidity and Capital Resources
At September 30, 1999, we had working capital of $89.9 million,
including $68.3 million of cash and cash equivalents, and no outstanding bank
debt. During the nine months ended September 30, 1999, our operating activities
provided cash of $50.3 million and during the nine months ended September 30,
1998 our operating activities provided cash of $27.1 million. The increase is
primarily due to increased net income in 1999, an increase in accrued expenses,
partially offset by an increase in accounts receivable.
11
<PAGE>
During the nine months ended September 30, 1999, we used cash for
investing activities of $46.0 million, consisting primarily of $8.8 million of
capital expenditures and $37.5 million for acquisitions accounted for under the
purchase method net of cash acquired in acquisitions. We will pay approximately
$1.3 million in additional purchase price for the Lanier acquisition, related to
a net asset adjustment. The $1.3 million has been accrued through purchase
accounting and is reflected in accrued expenses on the balance sheet at
September 30, 1999. During the nine months ended September 30, 1998, we used
cash for investing activities of $12.9 million, consisting primarily of $10.9
million of capital expenditures and $5.9 million for acquisitions accounted for
under the purchase method net of cash acquired in acquisitions, partially offset
by $4.0 million for the sale of investments.
During the nine months ended September 30, 1999, net cash provided by
financing activities was $48.1 million, consisting primarily $51.0 million in
proceeds from the issuance of common stock, including option and warrant
exercises and sales in connection with employee benefit plans offset by $2.7
million of debt repayments, and $219,000 of shareholder distributions to former
stockholders of acquired S-corporations. During the nine months ended September
30, 1998, we used cash for financing activities of $3.4 million, consisting
primarily of $6.1 million in repayments of long term debt, $1 million of
shareholder distributions to former stockholders of acquisition S-corporation,
offset by $3.6 million in proceeds from the exercise of options and warrants and
sales in connection with employee benefit plans.
On April 29, 1999, the Securities and Exchange Commission declared
effective a registration statement relating to the sale of 4.5 million shares of
MedQuist common stock at a price of $33.625 per share. Of the 4.5 million shares
offered, 800,000 were sold by MedQuist and 3.7 million were sold by existing
shareholders. The net proceeds of the 800,000 shares sold by MedQuist totaled
$25.6 million, net of underwriting commissions and offering expenses.
On May 12, 1999, the underwriters exercised their overallotment option
for the purchase of 505,000 shares of common stock from the Company at the
offering price of $33.625 per share. The net proceeds of the overallotment
option totaled $16.2 million.
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.
12
<PAGE>
We can use the Chase facility for working capital and general corporate
purposes. If any amounts under the Chase facility are repaid, other 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 September 30, 1999, we had no
outstanding borrowings under the Chase facility.
We believe that our cash and cash equivalents generated from operations
and borrowing capacity under the Chase facility will be sufficient to meet our
current working capital and capital expenditure requirements.
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.
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;
13
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o accelerate the conversion of some clients from outdated software
applications to compliant software applications; and
o upgrade some of the financial systems.
We believe that substantially all of our systems that we believe to be mission
critical are Y2K compliant. We are in the process of reviewing our client
service centers to identify and address any such critical systems that may have
been inadvertently overlooked. We are also reviewing applications that we
believe are non-critical for potential Y2K compliance issues, and, at our
discretion, we are making technical or operational changes to address these
issues. In some instances, we are applying patches to the non-critical systems.
In other instances, we are modifying our operational procedures to avoid any
potential disruption to our clients.
We are in the process of converting clients from acquired companies, e.g., LPSI,
to one of our standard Y2K complaint transcription platforms. We have been
letting these clients know that their current transcription platforms may not be
Y2K compliant. In some cases, these clients have slowed down the conversion
process due to client-specific issues, such as the limited availability of the
client's IT staff. We are addressing these issues on a case-by-case basis since
the Y2K issues for a specific piece of software or hardware may not have any
impact on the client's business operations or MedQuist's ability to deliver
transcribed reports. We do not currently anticipate any material exposure to our
business due to Y2K problems with these acquisitions.
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;
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
14
<PAGE>
parties that they will be Year 2000 compliant. Based on the responses we have
received to date, we have not encountered any uncorrectable problems, and we
presently do not expect any material adverse impact on or business due to third
party Year 2000 problems. However, there can be no assurance that their
responses are accurate, that we will receive responses from all third parties or
that we will not encounter Year 2000 problems created by these third parties.
Contingency Plans. We have developed Year 2000 contingency plans, which include
having a team of technicians working throughout the weekend of January 1 to
address any issues that may arise. 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 document all patient encounters manually. Upon restoration of a
functional environment, this information would be dictated and transcribed
through traditional methods.
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.
15
<PAGE>
Item 3. 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 September 30, 1999. For investment securities, the table presents principal
amounts and related weighted average interest rates (dollars in thousands).
Cash and cash equivalents $68,299
Average interest rate 4.0%
Warrant investment $ 540
Average interest rate ---
Total portfolio $68,839
Weighted average interest rate 3.8%
Special Note Concerning Forward Looking Statements
- --------------------------------------------------
Some of the information in this Form 10-Q 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 following risks: risks associated with (1) our
ability to recruit and retain qualified transcriptionists; (2) acquisitions; (3)
dependence on our senior management team; (4) the impact of new services or
products on the demand for our services; (5) our dependence on a single line of
business; (6) our ability to expand our customer base; (7) our ability to
maintain our current growth rate in revenue and earnings; (8) the volatility of
our stock price; (9) our ability to compete with others; (10) changes in law;
(11) infringement on the proprietary rights of others; (12) our failure to
comply with confidentiality requirements; (13) our customers' and suppliers'
failure to be Year 2000 compliant; and (14) our various anti-takeover
protections. When considering these forward-looking statements, you should keep
in mind these risk factors and other cautionary statements in this prospectus,
and should recognize that those forward-looking statements speak only as of the
date made. MedQuist does not undertake any obligation to update any
forward-looking statement included in this Form 10-Q.
16
<PAGE>
Part II - Other Information
---------------------------
Item 1. - Legal Proceedings - Not Applicable
Item 2. - Changes in Securities and Use of Proceeds - Not Applicable
Item 3. - Default upon Senior Securities - Not Applicable
Item 4. - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. - Other Information - Not Applicable
Item 6. - Exhibits and Reports on Form 8-K
Exhibits:
Financial Data Schedule 27.0
Reports on Form 8-K - Not Applicable
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MedQuist Inc.
Registrant
Date: November 11, 1999
By: /s/John R. Emery
------------------------
John R. Emery
Chief Financial Officer
18
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