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Largest U.S.-Based Medical Transcription Company
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Forward -Looking Statements
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o This presentation contains certain statements by or relating to MedQuist and
the transaction with Philips that are neither reported financial results nor
other historical information. These statements are forward-looking
statements and include statements of market estimates, growth and expansion
plans and opportunities, potential revenue and cost synergies, and the
benefits of new technologies. These forward-looking statements are subject
to risks and uncertainties that could cause actual results to differ
materially from those expressed in the forward looking statements. Many of
these risks and uncertainties relate to factors that are beyond MedQuist's
ability to control or estimate precisely, including, without limitation,
future market and economic conditions; the behavior of other market
participants; MedQuist's ability to lower telecom costs; MedQuist's ability
to achieve anticipated productivity gains; MedQuist's ability to implement
and achieve market acceptance of new technology platforms, including speech
processing technology; MedQuist's ability to successfully integrate acquired
businesses and achieve anticipated synergies; MedQuist's ability to recruit
and retain qualified transcriptionists and other employees; the impact of
new services or products or the demand for MedQuist's services; and
MedQuist's ability to expand its customer base. These and other risk factors
are detailed in MedQuist's reports, including its Form 10-K for the year
ended December 31, 1999 filed with the SEC. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only
as of the date of this presentation. MedQuist does not undertake any
obligation to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date of these
materials.
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Certain Tender Offer Terms
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o The tender offer referred to in this presentation for outstanding shares of
common stock of MedQuist has not yet commenced, and this presentation is
neither an offer to purchase nor a solicitation of an offer to sell
securities or any recommendation with respect to the tender offer. The
tender offer will be made only through the Offer to Purchase and related
Letter of Transmittal. We urge MedQuist shareholders to read the following
documents, when they become available, regarding the tender offer because
they contain important information: (i) Philips' Tender Offer Statement on
Schedule TO, including the Offer to Purchase, Letter of Transmittal and
Notice of Guaranteed Delivery; and (ii) MedQuist's Solicitation/
Recommendation Statement on Schedule 14D-9. These documents will be filed
with the Securities and Exchange Commission when the tender offer commences.
When these and other documents are filed with the SEC, they may be obtained
free of charge at the SEC's website at www.sec.gov.
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MedQuist History
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o 1970 Company founded as Transcriptions, Ltd.
In 1970s and 1980s company expands geographically from
Philadelphia base to become national competitor.
o 1994 Transcriptions, Ltd. acquired by MedQuist Inc.
MedQuist divests all other businesses and becomes transcription
"pure play". Revenue - $35m. Stock price - $2.50. Market cap -
$20m.
o 1996 MedQuist completes secondary stock offering
Revenue - $60m. Stock price - $5.50. Market cap - $120m
o 1998 MedQuist acquires largest competitor
Revenue - $271m. stock price - $24.00. Market cap - $850m
o Pending Philips offers to acquire 60% stake in MedQuist
Philips and MedQuist to form technology partnership
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Rationale for Philips Transaction
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o MedQuist
- gains committed technology partner with global resources and world-class
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technology
- plans to leverage Philip's resources and technology to accelerate
revenue growth and margin expansion
o Philips
- moves further into healthcare services
- gains a significant growth opportunity
- leverages speech and digital technology capabilities
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Transaction Structure
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o Consideration: $51 cash per share for approximately 23.4 million shares
(approx. 60% on a fully-diluted basis)
o Governance: 6 Philips directors; 2 MedQuist management directors; 3
independent directors
o Management: sells 37% of shares; locks up balance for 2 years;
signs 3 year employment agreements; receives new options
struck at $51 and $70
o Standstill: may purchase up to 75% of shares at any time; may
purchase greater than 75% only if 100% with approval of
independent directors; may not sell shares for 1 year;
may sell shares after 1 year only if same deal is
offered to minority shareholders or company is sold
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MedQuist Business Model -- Today
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[CHART OF BUSINESS MODEL]
[Showing transcription process as it exists today.]
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Changes to MedQuist Business Model
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Today Tomorrow
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o Voice-Files Analog Digital
o Voice-File Transfer Dial-up Compressed Download
o Dictation Mode Telephone Wireless Handheld
o Dictation Capture Platform Local Office Regional Data Center
o Speech Recognition No Yes
o Automated Report Coding No Yes
o Data Mining No Yes
o ASP Model No Yes
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MedQuist Leads the Market...
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...but is still a small fraction of the total market
[PIE CHART]
Rest of Market $15 - $16 Billion
MEDQ = $330M
Next 4 = $140M
Next 10 approximately $75M
Next 1,500 approximately $455M
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Barriers to Entry are High
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o Workforce: 8,500 transcriptionists
o Long term customer base: 750 large health systems and 2,400 billable
customers
o Geographic presence: 68 offices and transcriptionists in all 50 states
o Successful acquisition track record: 32 completed
o MedQuist has only experienced executive management team in industry: 150+
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combined years in this business
o Others have tried to enter MedQuist's market....and failed
- Rodeer
- Transcend
- EDix
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University HealthSystem Consortium Ranks MedQuist #1
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[BAR GRAPH]
[Showing University Health System Consortium's Rankings which identify
MedQuist as the best of seven transcription services based on the Consortium's
point scale.]
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MedQuist's Blue Chip Client Base
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Baptist Healthcare Group Duke University Medical Center
Beth Israel Medical Center Emory University Hospital
Brigham & Women's Hospital Hosp. of the University of Pennsylvania
Buffalo General New England Medical Center
Centennial Medical Center Northwestern Memorial Hospital
Children's Hospital of Los Angeles Ohio State University Medical Center
Christ Hospital Pacific Medical Clinics
CIGNA Health Plan of Arizona Salt Lake Clinic
Columbia/HCA Tampa General Hospital
Columbia-Presbyterian Hospital Universal Health Systems
Crawford Long Medical Center Walter Reed Army Medical Center
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Four Trends Driving Demand
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(Consolidation) -- Fewer Independent Hospitals
(Connectivity) -- Records Must Be Networked
Electronically
(Cost) -- Outsource Administrative
Areas
(Compliance) -- Increased Documentation
Requirements
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Leverage Relationships with Hospital Clients
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[GRAPHIC]
[Showing intention to leverage relationships with hospital clients including
expanding from emergency medicine/medical records departments in
traditional hospital/outpatient clinics as the "current core market" into other
hospital departments (such as radiology, pathology, cardiology and oncology) and
into managed care/HMO organizations and physician practice groups.]
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Track Record of Successful Acquisitions
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o 32 Acquisitions Completed To-Date
o 1,500+ Available Acquisition Candidates
o Typical Multiple 4-5 x Cash Flow
o Quickly Grow Margins: MRC Pre-Tax Margin was 5.9%
o Acquisitions Bring Skilled Transcriptionists
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Consistent Revenue Growth
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[BAR GRAPH]
[Showing revenue growth from 1994 through 1999.]
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Best-in-Class Margins
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[BAR GRAPH]
[Showing Pre-tax margins from 1994 through 1999.]
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Strong Cash Flow
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[BAR GRAPH]
[Showing cash flow from operations from 1994 through 1999.]
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Stable Earnings
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[BAR GRAPH]
[Showing comparison of actual earnings per share (EPS) against consensus street
forecast from 3/1/95 through 3/1/00.]
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Opportunities for MedQuist and Philips
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[CHART]
[Showing opportunities available for MedQuist and Philips to expand and improve
transcription services.]
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Digital Platform
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o 360 million long distance minutes annually
- Convert from analog dialup to digital download
o Analog dialup: 5 minute dictation = 15-20 minute phone call
o Digital download: 5 minute dictation = 2-5 minute phone call
o 180 million minutes x $0.05/minute = $9 million savings
o Looked at differently:
- Telecom cost % of revenue:
o MedQuist total - 10.2%; Internet subsidiary - 6.3%
o (10.2% - 6.3%) x $350 million = $13.6 million savings
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Data Centers
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o MedQuist currently has 68 offices in the U.S.
o MedQuist's office payroll = 12.6% of total revenue
o Substantial portion of office payroll: dictation capture/routing
o Replace office-based dictation capture/routing with regional data centers
- 2-10 headcount reduction per office
- Eliminate offices
- Standardize platform
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Speech Recognition
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Demand Exceeds Capacity!
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o Capacity is principal constraint on MedQuist's growth rate
o Many offices frequently in backlog
o If speech recognition can increase productivity of current
transcriptionists...
o Immediate incremental revenue opportunity
o High profit potential
o If speech recognition can expand workforce to include unskilled typists who
understand medical terminology...
o Additional revenue and profit opportunity
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Vertical Integration - Automated Coding
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o Coding market nearly as large as transcription market
o Coding next step in "service chain" after transcription
o Automated coding reduces costs, increases compliance
o A-Life capable of automated coding
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Vertical Integration - Data Mining
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o 3 billion lines of transcribed text annually
o Benchmarking data to hospitals
o Clinical data to pharmaceutical cos, medical device cos, MCO's
o A-Life capable of extracting relevant data
o Major healthcare information brokers keenly interested
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Vertical Integration - HIT Interfaces
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o MedQuist interfaces with nearly all HIT companies
o SMS, McKesson/HBOC, IDX, Eclypsis, Cerner
o These companies eager to include transcription in their products
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Ambulatory Market
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o Less than 1% of MedQuist current revenues
o Enormous potential market - Virtually all 700,000 U.S.-based physicians
generate clinical notes from their offices
o Emerging offerings: hand-held wireless devices; ASP model
o Many competitors - WebMD/Healtheon, AllScripts, etc. - eager to partner with
MedQuist in pursuing this market
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Non-U.S. Markets
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o Same size or larger than U.S. market
o Philips brand image and infrastructure strongly developed
o Duplicate MedQuist's successful U.S. model
o Internet makes back office location less crucial
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MedQuist Summary
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o Leads large and growing market
o High entry barriers
o Consistent, recurring revenue growth
o Best-in-class margins
o Strong cash flow
o Additional opportunities
- Digital platform / data centers
- Speech recognition
- Vertical integration
- Other markets
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