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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (the "Act")
MEDQUIST INC.
(Exact name of registrant as specified in its charter)
For the fiscal year ended December 31, 1999 Commission file number 0-19941
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
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (856) 596-8877
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock (no par value)
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 report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates was approximately $956 million on March 27, 2000, based on the
closing price of Registrant's Common Stock as reported on the Nasdaq National
Market as of such date.
The number of shares of the Registrant's Common Stock, no par value,
outstanding as of March 27, 2000 was 35,548,830.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated by reference.
Part III - Proxy Statement to be filed with the Commission in
connection with the 2000 Annual Meeting.
PART I
Item 1. 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
8,000 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 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 $330.0 million in 1999. 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.
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, 1999, we had
acquired The MRC Group, Inc. and 29 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.
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.
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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.
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 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
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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 8,000 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.
We serve approximately 2,300 clients through 68 client service centers
nationwide. 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 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 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 many of our senior management personnel, including our
Chairman and Chief Executive Officer, Mr. Cohen, have sales responsibilities.
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
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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 new business development department that integrates
these partnerships into useable product and service offerings.
Item 2. PROPERTIES
The Company does not own any real property. The Company leases office
and other space for its service centers nationally. The Company's typical
service center ranges in size from 1,000 to 7,000 square feet and is leased for
a term ranging from three to five years. The Company's executive offices
comprise 20,000 square feet and has 4 years remaining on its lease. The Company
believes that there is adequate office space available to it should it need to
move or expand and that minimal leasehold improvements are required in order to
open a new location.
Item 3. LEGAL PROCEEDINGS
Although the Company from time to time in the course of the operation
of its business is subject to various legal proceedings, the Company is not
currently a party to any material pending legal proceeding nor, to the knowledge
of the Company, is any material legal proceeding currently threatened.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
5
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Our 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 our Common Stock for the last two fiscal years and for the first quarter of
2000. 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
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 $38.69 $27.69
Second Quarter 43.75 26.69
Third Quarter 45.75 30.00
Fourth Quarter 37.06 24.75
2000
First Quarter (through March 27) $29.3125 $16.875
The above noted bid quotations reflect a three for two stock split
effected on June 15, 1998.
On March 27, 2000 the closing sale price for the Common Stock, as
reported on the Nasdaq National Market, was $28.25 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.
6
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following financial information is derived from our audited
financial statements which have been restated to reflect our 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", our audited financial statements
and related notes and other information that we have filed with the SEC.
Year Ended December 31,
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(In thousands, except per share data)
Statement of Operations Data:
Revenue $109,657 $152,109 $216,158 $271,655 $330,008
Costs and expenses:
Cost of revenue 86,265 118,978 169,235 209,587 238,180
Selling, general and administrative 9,144 11,908 14,362 16,061 11,763
Depreciation 5,752 7,372 10,339 12,697 12,000
Amortization of intangible assets 896 3,150 5,652 3,757 5,333
Transaction costs and restructuring
charges 347 644 2,075 18,221 (2,648)
-------- -------- -------- -------- --------
Total operating expenses 102,404 142,052 201,663 260,323 264,628
-------- -------- -------- -------- ---------
Operating income 7,253 10,057 14,495 11,332 65,380
(Gain) on sale of securities -- -- -- -- (309)
Interest expense (income), net 4,252 2,049 469 (325) (1,955)
-------- -------- -------- -------- --------
Income from continuing
operations before income taxes 3,001 8,008 14,026 11,657 67,644
Income tax provision (benefit) 640 2,720 5,293 8,472 27,439
-------- -------- -------- -------- --------
Income from continuing operations 2,361 5,288 8,733 3,185 40,205
Discontinued operations (1,729) -- -- -- --
Extraordinary item (545) -- -- -- --
-------- -------- -------- -------- --------
Net income 87 5,288 8,733 3,185 40,205
Inducement of warrant exercise -- (707) -- -- --
-------- -------- -------- -------- --------
Net income available to
common shareholders $ 87 $ 4,581 $ 8,733 $ 3,185 $ 40,205
======== ======== ======== ======== ========
Basic income per share:
Continuing operations $ 0.23 $ 0.22 $ 0.28 $ 0.10 $ 1.14
Discontinued operations (0.17) -- -- -- --
Extraordinary item (0.05) -- -- -- --
Inducement of warrant exercise -- (0.03) -- -- --
-------- -------- -------- -------- --------
$ 0.01 $ 0.19 $ 0.28 $ 0.10 $ 1.14
======== ======== ======== ======== ========
Diluted income per share:
Continuing operations $ 0.22 $ 0.20 $ 0.26 $ 0.09 $ 1.09
Discontinued operations (0.16) -- -- -- --
Extraordinary item (0.05) -- -- -- --
Inducement of warrant exercise -- (0.03) -- -- --
-------- -------- -------- -------- --------
$ 0.01 $ 0.17 $ 0.26 $ 0.09 $ 1.09
======== ======== ======== ======== ========
7
Balance Sheet Data:
As of December 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
------- -------- --------- -------- --------
(In thousands)
Working capital $13,142 $ 33,483 $ 36,608 $ 41,852 $ 99,354
Total assets 91,191 158,551 173,773 187,311 302,183
Long-term debt, net of current portion 23,342 9,964 7,589 215 452
Shareholders' equity 30,572 120,710 131,373 151,186 256,536
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are the leading national provider of medical transcription services.
Substantially all of our revenue to date has been derived from the provision of
medical transcription services, which we recognize when we render services and
deliver reports. We also derive an insignificant amount of revenue from services
other than traditional transcription services, such as coding revenue,
interfacing fees, equipment rentals, referral fees and commissions from
strategic partners. Fees for medical transcription services are based primarily
on contracted rates and revenue is recognized upon the rendering of services and
delivery of transcribed reports. Revenues from other sources are recognized when
earned.
For purposes of our discussion and analysis of our results of
operations we distinguish our revenue growth as "core growth" and growth from
large acquisitions. Core growth includes revenue from all of the above sources
and revenue from acquisitions with annual sales under $5 million, prior to the
date of acquisition. Revenue arising from acquisitions having annual revenue in
excess of $5 million, prior to the date of acquisition, is discussed separately
in our analysis of revenue growth.
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 in nature, but includes certain fixed components. 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 in nature, but
include certain variable components.
From 1995 through 1999, we completed 29 acquisitions. Six acquisitions,
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.
8
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:
Year Ended December 31,
--------------------------------
1997 1998 1999
------ ------ ------
Revenue 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenue 78.3 77.2 72.2
Selling, general and administrative 6.6 5.9 3.6
Depreciation 4.8 4.7 3.6
Amortization of intangible assets 2.6 1.4 1.6
Transaction costs and restructuring charges 1.0 6.7 (0.8)
----- ----- -----
Operating income 6.7 4.1 19.8
Gain on sale of securities -- -- 0.1
Interest income (expense), net (0.2) 0.1 0.6
----- ----- -----
Income before income taxes 6.5 4.2 20.5
Income tax provision 2.5 3.1 8.3
----- ----- -----
Net income 4.0% 1.1% 12.2%
===== ===== =====
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue. Revenue increased 21.5% from $271.7 million in 1998 to $330.0
million in 1999. The $58.3 million increase resulted from increased sales to
existing customers, sales to new customers and strategic partners and additional
revenue from acquisitions. The $58.3 million increase resulted from $46.8
million of core growth and $11.5 million from large acquisitions.
Cost of Revenue. Cost of revenue increased 13.6% from $209.6 million in
1998 to $238.2 million in 1999 and was directly related to the increase in
revenue. As a percentage of revenue, cost of revenue decreased from 77.2% in
1998 to 72.2% in 1999 due primarily to cost reductions associated from
eliminating excess operational support areas of MedQuist and MRC, and the
consolidation of duplicative facilities.
Selling, General and Administrative. Selling, general and
administrative expenses decreased 26.7% from $16.1 million in 1998 to $11.8
million in 1999. As a percentage of revenue, selling, general and administrative
costs decreased from 5.9% in 1998 to 3.6% in 1999. 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 decreased 5.5% from $12.7 million in 1998 to
$12.0 million in 1999. As a percentage of revenue, depreciation decreased from
4.7% in 1998 to 3.6% in 1999. The decrease resulted from certain capital assets
becoming fully depreciated late in 1998.
Amortization. Amortization of intangible assets was $3.8 million in
1998 compared to $5.3 million in 1999. 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 $325,000 in 1998 and interest
income of $2.0 million in 1999. The increase was a result of the investment of
excess cash balances in 1999.
9
Transaction Costs and Restructuring Charges. In 1998, we incurred (1)
$11.0 million of transaction costs associated with pooling of interests business
combinations, (2) $682,000 of transaction costs related to MRC's terminated
initial public offering and (3) a $6.5 million restructuring charge associated
with the MRC acquisition. In 1999 we revised our accrual estimates and $315,000
of the $11 million of transaction costs associated with pooling of interest
combinations and $2.3 million of the $6.5 million restructure charges were
reversed in connection with adjustments to our accruals and reserves.
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. As of December 31, 1999, $437,000 of noncancellable leases had been paid,
$1.3 million of the employee severance and $427,000 in other restructuring costs
had been paid. At December 31, 1999, $2.1 million was included in accrued
expenses related to the restructuring.
Non-Cancelable
Non-Cancelable Contracts and
Leases Severance Other Exit Costs Total
-------------- --------- ---------------- -----
(in thousands)
1998 Restructure Charge $3,835 $1,618 $1,086 $ 6,539
Payments against Restructure Accrual:
1998 0 (567) (410) (977)
1999 (437) (723) (17) (1,177)
Revision to estimate of 1998 restructure
Accrual, recorded in 1999: (1,492) (182) (659) (2,333)
----- ------ ------ -------
1998 Restructure accrual balance, at
December 31, 1999: $1,906 $ 146 $ 0 $ 2,052
====== ====== ====== =======
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,
1999, $1.0 million related to closed facility leases remained in accrued
expenses.
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 resulted
entirely from core growth.
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.
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.
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Amortization. Amortization of intangible assets was $5.7 million in
1997 as compared to $3.8 million in 1998. The amount in 1997 includes
amortization of noncompete agreements from prior business acqusitions 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 signficant 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 completed the restructuring in 1999. As of 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 acquistion 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.
Liquidity and Capital Resources
At December 31, 1999, we had working capital of $99.4 million,
including $62.0 million of cash and cash equivalents, and no outstanding bank
debt. During 1999, our operating activities provided cash of $60.2 million and
during 1998 our operating activities provided cash of $22.9 million. Our cash
flow from operating activities is generated primarily from our net income before
depreciation and amortization.
During 1999, we used cash for investing activities of $62.3 million,
consisting primarily of $14.2 million of capital expenditures. In addition, we
generated $309,000 in cash from sales of short-term investments and used $48.4
million for the acquisition of businesses accounted for under the purchase
method. During 1998, we used cash for investing activities of $15.9 million,
consisting primarily of $14.0 million of capital expenditures. In addition, in
1998 we generated $4.0 million in cash from sales of short-term investments and
used $4.4 million for the acquisition of businesses accounted for under the
purchase method. In addition, we paid $1.4 million to a dissenting shareholder
in connection with the Signal acquisition
During 1999, cash provided by financing activities was $48.1 million,
consisting primarily of $51.2 million from the issuance of common stock, in our
secondary offering and option and warrant exercises and sales in connection with
employee benefit plans, partially offset by $2.8 million of debt repayments.
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.
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
11
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 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. During 1999 we had no outstanding borrowings under the Chase
facility.
We believe that cash flow generated from operations and our borrowing
capacity whether under the Chase Facility, or otherwise, will be sufficient to
meet our current working capital and capital expenditure requirements. In 2000,
we expect capital expenditures as a percentage of revenue to be consistent with
prior years.
Year 2000 Compliance
To date, we have not experienced any material Year 2000 issues. We have
not spent a material amount of funds on Year 2000 issues, and currently believe
all systems are Year 2000 compliant. We will continue to monitor for any Year
2000 problems.
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, 1999. For investment securities, the table presents principal
amounts and related weighted average interest rates (dollars in thousands).
Cash and cash equivalents $62,024
Average interest rate 4.7%
Warrant investment $ 1,083
Average interest rate -
Total portfolio $63,024
Weighted average interest rate 4.6%
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.
Forward-Looking Statements
Some of the information in this Form 10-K 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) inability to
complete and assimilate acquisitions of businesses; (3) dependence on our senior
management team; (4) the impact of new services or products on the demand for
12
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 relating to the classification of
our transcriptionists; (11) potential infringement on the proprietary rights of
others; (12) our failure to comply with confidentiality requirements; and (13)
our customers' and suppliers' failure to be Year 2000 compliant. 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.
MedQuist does not undertake any obligation to update any forward-looking
statement included in this Form 10-K.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements. The information called for
by this Item is set forth on Pages F-1 through F-22.
13
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
the Company's Proxy Statement to be filed with the Commission in connection with
the 2000 Annual Meeting.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Company's Proxy Statement to be filed with the Commission in connection with
the 2000 Annual Meeting.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the Company's Proxy Statement to be filed with the Commission in connection with
the 2000 Annual Meeting.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the Company's Proxy Statement to be filed with the Commission in connection with
the 2000 Annual Meeting.
14
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Exhibit No. Description
- -------------- ---------------
3.1 Amended and Restated Certificate of Incorporation of the
Company [incorporated by reference to Exhibit 1 of the
Company's Current Report on Form 8-K filed August 15, 1997].
3.2 By-Laws of the Company [incorporated by reference to Exhibit
3.2 of the Company's 1993 Annual Report on Form 10-K (the
"1993 10-K")].
3.3 Certificate of Designation of Terms of Preferred Stock
[incorporated by reference to Exhibit 3.3 of the Company's
1992 Annual Report on Form 10-K (the "1992 10-K)].
4.1 Specimen Stock Certificate [incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement (No.
333-3050) on Form S-1 (the "1996 Registration Statement")].
*10.1 Agreement between the Company and Richard J. Censits, dated
January 29, 1996 [incorporated by reference to Exhibit 10.1 of
the 1996 Registration Statement].
*10.2 Incentive Stock Option Plan of the Company, dated January 1988
[incorporated by reference to Exhibit 10.2 of the Company's
Registration Statement (No. 33-95968) on Form S-1 (the "1992
Registration Statement")].
*10.3 Stock Option Plan of the Company, dated January 1992, as
amended [incorporated by reference to Exhibit 10.3 of the 1996
Registration Statement].
*10.4 Nonstatutory Stock Option Plan for Non-Employee Directors of
the Company, dated January 1992 [incorporated by reference to
Exhibit 10.4 of the 1992 Registration Statement].
*10.5 Employment Agreement by and between the Company and John R.
Emery, [incorporated by reference to Exhibit 10.5 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (the "1996 10-K")].
*10.6 Employment Agreement by and between the Company and David A.
Cohen, dated May 1, 1994 ("Cohen Employment Agreement")
[incorporated by reference to Exhibit 10.33 of the Company's
Form 10-Q for the three-month period ended June 30, 1994 (the
"6/30/94 10-Q")].
*10.7 Amendment to Cohen Employment Agreement, dated March 1, 1996
[incorporated by reference to Exhibit 10.7 of the 1996
Registration Statement].
*10.8 Employment Agreement by and between the Company and John A.
Donohoe, dated May 27, 1994 ("Donohoe Employment Agreement")
[incorporated by reference to Exhibit 10.8 of the 1996
Registration Statement].
*10.9 Amendment to Donohoe Employment Agreement, dated March 1, 1996
[incorporated by reference to Exhibit 10.9 of the 1996
Registration Statement].
*10.10 Employment Agreement by and between the Company and Ronald F.
Scarpone, dated May 27, 1994, as amended March 1, 1996
[incorporated by reference to Exhibit 10.10 of the 1996
Registration Statement].
10.23 Registration Rights Agreement among the Company, David A.
Cohen and Edward Forstein, dated September 30, 1996,
[incorporated by reference to Exhibit 10.30.4 of the 9/30/95
10-Q].
15
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Exhibit No. Description
- -------------- ---------------
10.24 Amended and Restated Credit Agreement among the Company,
Transcriptions, Ltd., the Guarantors named therein, the
Lenders named therein and Chemical Bank as agent, dated
December 29, 1996 [incorporated by reference to Exhibit 10.24
of the 1996 Registration Statement].
10.28 Form of Employee Stock Purchase Plan [incorporated by
reference to Exhibit 10.33 of the 1996 Registration
Statement].
22.1 Subsidiaries [incorporated by reference to Exhibit 22.1 of the
1996 Registration Statement].
23.1 Consent of Arthur Andersen LLP, filed herewith.
24.1 Powers of Attorney (included on signature page)
27.1 Financial Data Schedule, Files herewith
(b) Financial Statements and Financial Statement Schedule
1 The consolidated financial statements of the Company and its
subsidiaries filed as part of this Report are listed on the
attached Index to Consolidated Financial Statements. See page
F-1.
2 The Schedule to the consolidated financial statements of the
Company and its subsidiaries filed as part of this Report is
listed in the attached Index to Consolidated Financial
Statements. See page F-1.
(c) Reports on Form 8-K
During the fourth quarter of 1999, the Company filed no Reports on Form 8-K.
* Management contract or compensatory plan or arrangement.
16
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of Marlton, State of
New Jersey, on March 28, 1999.
MedQuist Inc.
By /s/David A. Cohen
-------------------------------------------
David A. Cohen, Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons as of March
28, 2000.
Each person below, in so signing, also makes, constitutes and appoints
David A. Cohen his true and lawful attorney-in-fact, with full power and
substitution and resubstitution, in his name, place and stead to execute and
cause to be filed with the Securities and Exchange Commission any or all
amendments to this Report.
Signatures Title
/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/ 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/ John A. Donohoe President and Director
- -----------------------------
John A. Donohoe
/s/ James R. Emshoff Director
- -----------------------------
James R. Emshoff
/s/ A. Fred Ruttenberg Director
- -----------------------------
A. Fred Ruttenberg
17
/s/ Richard H. Stowe Director
- ----------------------------
Richard H. Stowe
/s/ John H. Underwood Director
- ----------------------------
John H. Underwood
17
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
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, 1998 and 1999, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. 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
in the United States. 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, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles
in the United States.
/s/Arthur Andersen LLP
----------------------------------
Arthur Andersen LLP
Philadelphia, Pa.,
February 8, 2000
F-2
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31
---------------------------
1998 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 15,936 $ 62,024
Accounts receivable, net of allowance of $2,274 and $3,559 ............. 52,477 75,988
Deferred income taxes .................................................. 6,438 5,551
Prepaid expenses and other ............................................. 233 197
------------ ------------
Total current assets .................................... 75,084 143,760
Property and equipment, net ............................................... 27,022 31,715
Intangible assets, net .................................................... 82,216 123,317
Deferred income taxes ..................................................... -- 1,440
Other ..................................................................... 2,989 1,951
------------ ------------
$ 187,311 $ 302,183
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ...................................... $ 2,372 $ 1,530
Accounts payable ....................................................... 5,010 5,373
Accrued expenses ....................................................... 25,850 37,503
------------ ------------
Total current liabilities ............................... 33,232 44,406
------------ ------------
Long-term debt ............................................................ 215 452
------------ ------------
Other long-term liabilities ............................................... 697 789
------------ ------------
Deferred income taxes ..................................................... 1,981 --
------------ ------------
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock, no par value, 60,000 shares authorized, 33,258 and 35,902
shares issued and outstanding ........................................ -- --
Additional paid-in capital ............................................. 136,603 200,205
Retained earnings ...................................................... 14,536 55,918
Unrealized gain on marketable securities ............................... 585 704
Deferred compensation .................................................. (538) (291)
------------- ------------
Total shareholders' equity .............................. 151,186 256,536
------------ ------------
$ 187,311 $ 302,183
============ ============
The accompanying notes are an integral part of these statements.
F-3
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
Year Ended December 31
-------------------------------------
1997 1998 1999
---------- ---------- ----------
Revenues ............................................................ $ 216,158 $ 271,655 $ 330,008
Costs and expenses:
Cost of revenues ................................................. 169,235 209,587 238,180
Selling, general and administrative .............................. 14,362 16,061 11,763
Depreciation ..................................................... 10,339 12,697 12,000
Amortization of intangible assets ................................ 5,652 3,757 5,333
Transaction costs and restructuring charges ...................... 2,075 18,221 (2,648)
---------- ---------- ----------
Total costs and expenses ................................... 201,663 260,323 264,628
---------- ---------- ----------
Operating income .................................................... 14,495 11,332 65,380
Gain on sale of securities .......................................... -- -- 309
Interest income (expense), net ...................................... (469) 325 1,955
----------- ---------- ----------
Income before income taxes .......................................... 14,026 11,657 67,644
Income tax provision ................................................ 5,293 8,472 27,439
---------- ---------- ----------
Net income .......................................................... $ 8,733 $ 3,185 $ 40,205
========== ========== ==========
Basic net income per common share.................................... $ 0.28 $ 0.10 $ 1.14
========== ========== ==========
Diluted net income per common share.................................. $ 0.26 $ 0.09 $ 1.09
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-4
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Unrealized
Common Stock Additional Gain on
------------------------ Paid-in Retained Marketable Deferred
Shares Amount Capital Earnings Securities Compensation Total
------ ------ ------- -------- ---------- ------------ -----
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
stockholders 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
Comprehensive income
Net income ...................... 40,205 -- 40,205
Change in unrealized gain on
available for sale securities,
net of tax..................... -- 119 119
---------- ---------- ----------
Total comprehensive income .... 40,205 119 40,324
Exercise of Common stock options
and warrants, including tax
benefit ......................... 1,153 -- 18,812 -- -- -- 18,812
Income tax asset recognized in
pooling-of-interests transaction -- -- 1,187 -- -- -- 1,187
Issuance of Common stock in
connection with business
acquisitions .................... 171 -- 1,256 -- -- -- 1,256
Admustment for immaterial
poling-of-interests transaction.. -- -- -- 1,177 -- -- 1,177
Amortization of deferred
compensation .................... -- -- -- -- -- 247 247
Issuance of common stock, net of
expenses......................... 1,320 -- 42,347 -- -- -- 42,347
------- ---------- ----------- ---------- ---------- --------- ----------
BALANCE, DECEMBER 31, 1999............ 35,902 $ -- $ 200,205 $ 55,918 $ 704 $ (291) $ 256,536
======= ========== =========== ========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
F-5
MEDQUIST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31
---------------------------------------
1997 1998 1999
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income ........................................................... $ 8,733 $ 3,185 $ 40,205
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization .................................... 15,991 16,454 17,333
Gain on sale of securities ....................................... -- -- (309)
Amortization of deferred compensation ............................ -- 540 247
Deferred income tax benefit ...................................... (200) (3,213) (1,471)
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 ..................................... (7,230) (10,345) (15,685)
Prepaid expenses and other ................................... 631 97 186
Other assets ................................................. (362) 65 1,031
Accounts payable ............................................. 543 (767) 183
Accrued expenses ............................................. 3,175 15,729 18,420
Other long-term liabilities .................................. (87) (433) 92
----------- ----------- -----------
Net cash provided by operating activities ............. 21,417 22,852 60,232
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment .................................. (13,716) (14,027) (14,169)
Acquisitions, net of cash acquired ................................... (5,628) (5,839) (48,405)
Purchase of investments............................................... -- -- (472)
Proceeds from sale of securities and investments...................... 973 4,003 781
----------- ----------- -----------
Net cash used in investing activities ................. (18,371) (15,863) (62,265)
----------- ----------- -----------
FINANCING ACTIVITIES:
Repayments of long-term debt and subordinated payable ................ (3,757) (10,006) (2,834)
Distributions ........................................................ (1,100) (1,014) (219)
Proceeds from exercise of Common stock options and warrants .......... 1,785 5,065 9,316
Net proceeds from issuance of Common stock ........................... 251 413 41,858
Purchase and retirement of Common stock, at cost ..................... (676) -- --
----------- ----------- -----------
Net cash (used in) provided by financing activities ... (3,497) (5,542) 48,121
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS ................................................. (451) 1,447 46,088
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR .............................................................. 14,940 14,489 15,936
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR .................................. $ 14,489 $ 15,936 $ 62,024
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-6
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 to the healthcare industry in the United States.
MedQuist was incorporated in New Jersey in 1984 and reorganized in 1987. From
1995 through 1999, the Company completed 29 acquisitions, of which 23 were
accounted for as purchase transactions and six were accounted for as
pooling-of-interests. Accordingly, the accompanying financial statements have
been retroactively restated to reflect the four material acquisitions accounted
for under the pooling-of-interests method (see Note 2).
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
The Company's revenue consists primarily of fees generated in the provision of
medical transcription services. Fees for medical transcription services are
based primarily on contracted rates, and revenue is recognized upon the
rendering of services and delivery of transcribed reports. Revenues are also
derived from coding services, interfacing fees, equipment rentals and referral
fees and commissions from strategic partners. Revenues from these other sources
are recognized as earned and are immaterial both individually and in the
aggregate.
F-7
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)
Pro Forma Presentation for Income Taxes
Prior to their pooling-of-interests mergers with the Company, two 1998
acquisitions 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 these two companies had been taxed as "C" Corporations for all periods
presented.
Year Ended December 31
1997 1998
--------- --------
Income before income taxes, as reported ......... $ 14,026 $ 11,657
Pro forma income tax provision .................. 5,975 8,766
-------- --------
Pro forma net income ............................ $ 8,051 $ 2,891
======== ========
Pro forma net income per share:
Basic ...................................... $ 0.25 $ 0.09
Diluted .................................... $ 0.24 $ 0.08
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 in
January 1998. At December 31, 1999, cash and cash equivalents were restricted by
a letter of credit of $1,400 which was used to repay a note in January 2000.
Investments
Included in other assets at December 31, 1998 and 1999, is a warrant to purchase
common stock in Lernout 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, based on an estimate using the
Black-Scholes option pricing model, 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 and 1999 was $585 and $704,
respectively.
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.
F-8
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)
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. is being amortized over 40 years. The goodwill related
to subsequent acquisitions is being amortized over 20-30 years. Customer lists
and employee bases are being amortized over 10-20 years and three to five years,
respectively. Non-compete agreements are amortized over their terms, ranging
from 1.5 years to four years.
Long-Lived Assets
Subsequent to its acquisitions, the Company continually evaluates whether later
events and circumstances have occurred that indicate that the remaining
estimated useful life of long-lived assets may warrant revision or that the
remaining balance may not be recoverable. When factors indicate that long-lived
assets should be evaluated for possible impairment, the Company uses an estimate
of the related undiscounted cash flows in measuring whether the long-lived 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, 1999, management believes that no
revision to the remaining useful lives or write-down of long-lived assets is
required.
Transaction Costs and Restructuring Charges
During 1997 and 1998, the Company incurred certain charges resulting from
restructurings, transaction costs associated with pooling-of-interests
acquisitions and expenses incurred in connection with MRC's terminated initial
public offering. In 1999, the Company recognized income in connection with their
revised estimate of the required reserves.
Year Ended December 31
-----------------------------------
1997 1998 1999
----------- ---------- ----------
Restructuring charges ..................... $ 2,075 $ 6,539 $ (2,333)
Transaction costs associated with
pooling-of-interests .................... -- 11,000 (315)
Terminated initial public offering costs .. -- 682 --
------- ------- ---------
$ 2,075 $18,221 $ (2,648)
======= ======= ========
F-9
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 December 1998, the Company's board of directors approved management's
restructuring plan associated with the MRC merger. The plan related primarily to
the closure of several redundant operating facilities as well as certain
corporate offices in order to improve operating efficiencies. Costs associated
with the plan of approximately $6,539 were 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."
The following table reflects the significant components of the restructuring
charge for the year ended December 31, 1998:
Non-cancelable leases ..................................... $ 3,835
Severance ................................................. 1,618
Non-cancelable contracts and other exit costs ............. 1,086
-------
$ 6,539
=======
In 1999, the Company revised its estimate of the required reserves and reversed
$2,333 of the 1998 restructuring charges as follows:
Non-cancelable leases ..................................... $ (1,492)
Severance ................................................. (182)
Non-cancelable contracts and other exit costs ............. (659)
--------
$ (2,333)
========
The severance costs are attributable to 41 individuals from various levels of
operational and senior management. As of December 31, 1998 and 1999, $0 and $437
of noncancelable leases had been paid, $567 and $1,290 of severance had been
paid, and $410 and $427 of other restructuring costs had been paid. The
consolidated balance sheets at December 31, 1998 and 1999 reflect $5,562 and
$2,052 in accrued expenses related to the 1998 restructuring charge.
In 1997, MRC approved a separate management plan to close and/or merge several
redundant operating facilities 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, 1998 and 1999, approximately $1,213 and $1,003,
respectively, related to closed facility leases is included in accrued expenses.
F-10
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 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 fees ............................................... 1,540
-------
$11,000
=======
Advertising Costs
The Company charges advertising costs to expense as incurred. Advertising
expense was $678, $650 and $524 for the years ended December 31, 1997, 1998 and
1999, respectively.
Research and Development Costs
Research and development costs are charged to expense as incurred. Total
research and development costs were approximately $550, $813 and $0 for the
years ended December 31, 1997, 1998 and 1999, respectively.
Statements of Cash Flow Information
For the years ended December 31, 1997, 1998 and 1999, the Company paid interest
of $1,027, $695 and $125, respectively, and income taxes of $3,162, $6,705 and
$15,016, respectively. Capital lease obligations of $174, $98 and $0 were
incurred on equipment leases entered into in 1997, 1998 and 1999, respectively.
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 accounted for under the purchase method (see
Note 2):
Year Ended December 31
-------------------------
1997 1998 1999
------- ------- ------
Noncash net assets acquired ...................... $ 8,965 $ 4,401 $ 51,388
Less-Seller notes and payables ................... (3,337) -- (1,757)
Common stock issued .............................. -- -- (1,226)
Cash paid to dissenting stockholder
in pooling transaction ........................ -- 1,438 --
------- ------- -------
Net cash paid for business acquisitions ...... $ 5,628 $ 5,839 $ 48,405
======= ======= ========
F-11
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)
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.
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:
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------------------------------
1997 1998 1999
---------------------------------- --------------------------------- -------------------------------
PER PER PER
NET SHARE NET SHARE NET SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- ------ ------ ------ ------ ------ ------ ------ ------
Net income ......... $ 8,733 31,726 $ 0.28 $ 3,185 33,087 $ 0.10 $ 40,205 35,120 $ 1.14
Effect of dilutive
securities ........ -- 1,632 (0.02) -- 1,818 (0.01) -- 1,609 (0.05)
------ ------ ------ ------- ------ ------ -------- ------ ------
Diluted net
income ............ $ 8,733 33,358 $ 0.26 $ 3,185 34,905 $ 0.09 $ 40,205 36,729 $ 1.09
======= ====== ======= ======= ====== ====== ======== ====== ======
For the years ended December 31, 1997, 1998 and 1999, 1,961, 654 and 72 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 debt
obligations approximates 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
F-12
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)
accompanying Consolidated Statements of Shareholders' Equity. During 1997, there
were no other comprehensive items. For the years ended December 31, 1998 and
1999, the pre-tax unrealized gains on available-for-sale securities were $900
and $950, respectively, and the tax expense recorded on the unrealized gains
were $315 and $246.
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.
Recent Accounting Prouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hendging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - an
amendment of comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. As the Company does not
currently hold derivative instruments or engage in hedging activities, the
adoption of this prouncement is expected to have no impact on the Company's
financial position or results of operations.
Effective with the year ended December 31, 1999, the Company was subject to the
provisions of Statement of Position ("SOP") 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" and SOP 98-5,
"Reporting on the Costs of Start-up Activities". SOP 98-1 provides guidance on
accounting for computer software developed or obtained for internal use
including the requirement to capitalize specified costs and the amortization of
such costs. SOP 98-5 provides guidance on the financial reporting of start-up
activities and organization costs. It requires costs of start-up activities and
organization costs to be charged to expense as incurred. The adoption of SOP
98-1 and SOP 98-5 did not have a material impact on the Company's financial
position or results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. ACQUISITIONS
On May 28, 1998, the Company completed the acquisition of approximately 94% of
the outstanding capital stock of Digital Dictation, Inc. ("DDI") and on July 31,
1998 acquired the remaining shares. The Company issued 912 shares of its common
stock in exchange for all DDI shares. The acquisition was accounted for using
the pooling-of-interests method of accounting.
F-13
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per-share amounts)
2. ACQUISITIONS (CONTINUED)
On August 18, 1998, the Company completed the acquisition of Signal
Transcriptions Network, Inc. ("Signal"), which was accounted for using the
pooling-of-interests method 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. Signal and the Company have elected to
treat their merger as an asset purchase for income tax purposes. In connection
with this election, 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 tax purposes.
On November 30, 1998, the Company completed the acquisition of Transcriptions
Ltd. of Florida, Inc. ("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.
On September 18, 1998 the Company signed a definitive merger agreement with MRC,
and on December 10, 1998, the merger was consummated. Pursuant to the agreement,
the Company exchanged each share of MRC Common stock and each share of MRC
Preferred stock on an as-converted basis for 0.5163 shares of its Common stock.
In total, the Company issued 8,662 shares of its Common stock to the former MRC
shareholders and options to purchase an aggregate of 1,543 shares to the former
MRC option holders. The MRC merger was accounted for as a pooling-of-interests.
Accordingly, the Company's consolidated financial statements have been restated
to reflect the merger with MRC.
The Company's historical financial statements have been retroactively restated
to reflect the acquisitions of DDI, Signal, TLF and MRC. Revenue and net income
as previously reported for the years ended December 31, 1998 and 1997 and as
restated for the pooling of interests transactions is as follows:
Year Ended
December 31, 1998
-----------------------------------
Revenues Net Income (Loss)
------------ -------------------
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 DDI and Signal amounts from July 1, 1998, and TLF and MRC amounts
from October 1, 1998, and includes $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.
F-14
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per-share amounts)
2. ACQUISITIONS -- (CONTINUED)
Year Ended
December 31, 1997
-----------------------------------
Revenues Net Income (Loss)
------------ -------------------
MedQuist, as previously reported ......... $ 84,495 $ 7,731
DDI ...................................... 10,026 616
Signal.................................... 9,294 1,100
TLF ...................................... 4,226 712
MRC ...................................... 108,117 (1,326)
--------- --------
Restated ................................. $ 216,158 $ 8,733
========= ========
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 $682 and
$294 for the years ended December 31, 1997 and 1998, respectively (see Note 1).
From 1997 through 1999, the Company completed several smaller acquisitions
accounted for using the purchase method and two acquisitions accounted for using
the pooling-of-interests method. Pro forma information is not presented as these
acquisitions are not material to the Company. Certain of the purchase
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
-------------------------
1998 1999
---------- ----------
Furniture, equipment and software .................. $ 52,571 $ 68,115
Leasehold improvements ............................. 1,553 2,377
-------- --------
54,124 70,492
Less- Accumulated depreciation and amortization .... (27,102) (38,777)
-------- --------
$ 27,022 $ 31,715
======== ========
4. INTANGIBLE ASSETS
December 31
-------------------------
1998 1999
---------- ----------
Goodwill .......................................... $ 67,109 $ 86,884
Customer lists .................................... 22,640 44,607
Non-compete agreements ............................ 3,405 6,576
Employee base ..................................... 2,514 4,079
Other ............................................. 150 37
-------- --------
95,818 142,183
Less- Accumulated amortization .................... (13,602) (18,866)
-------- --------
$ 82,216 $123,317
======== ========
F-15
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per-share amounts)
5. ACCRUED EXPENSES
December 31
-------------------------
1998 1999
---------- ----------
Accrued payroll and related taxes .................. $ 9,329 $ 14,673
Restructuring charges .............................. 6,775 3,056
Income taxes payable ............................... 1,019 5,757
Other .............................................. 8,727 14,017
------- --------
$25,850 $ 37,503
======= ========
6. LONG-TERM DEBT
December 31
-------------------------
1998 1999
---------- ----------
Note payable to former shareholders of
acquired business, repaid in 1999 ............... $ 2,000 $ --
Subordinated promissory note, due
January 2000 .................................... -- 1,400
Subordinated promissory notes, due
December 2001 ................................... -- 357
Capital lease obligations .......................... 468 175
Other .............................................. 119 50
------- --------
2,587 1,982
Less- current portion .............................. (2,372) (1,530)
------- --------
$ 215 $ 452
======= ========
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, 1998 and 1999, the Company did
not incur any interest expense on the revolving credit facility, as there were
no borrowings on the credit facility.
In connection with MRC's 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 requires
the payment of interest quarterly along with equal monthly principal payments of
$117 through September 2001. The note was repaid in 1998.
F-16
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 the former shareholders totaling $2,000. The
notes required 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, 1999, are as follows:
2000 ................... $ 1,530
2001 ................... 443
2002 ................... 9
2003 ................... --
--------
$ 1,982
========
7. SHAREHOLDERS' EQUITY
In May 1999, the Company consummated a secondary public offering of its Common
stock, selling 800 shares at a price of $33.63 per share. In June 1999, the
underwriters exercised their overallotment option for an additional 505 shares.
After deducting the underwriters' discount and offering expenses, the net
proceeds to the Company were $41,858.
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
permitted conversion into Common stock at specified prices during specified
periods. 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, 1999, no warrants were outstanding.
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 may be granted 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 their Common stock. Accordingly, MRC
recorded deferred compensation totaling $1,078, of which $540 and $247 was
amortized to expense in 1998 and 1999, respectively.
F-17
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per-share amounts)
8. STOCK OPTION PLANS -- (CONTINUED)
Information with respect to the Company's common stock options is as follows:
Option Price Aggregate
Shares Per Share Proceeds
-------- ---------------- -----------
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
Granted ............................ 91 28.31 - 44.00 3,365
Exercised .......................... (1,153) 1.34 - 31.19 (9,316)
Canceled ........................... (202) 5.21 - 31.19 (4,253)
------ -------------- --------
Outstanding, December 31, 1999 ........ 3,169 $ 1.34 - 31.19 $ 42,905
====== ============== ========
At December 31, 1999, there were 1,691 exercisable options with an aggregate
exercise price of $16,275 and 605 additional options available for grant under
the plans.
The options outstanding and exercisable by exercise price at December 31, 1999
are as follows:
Weighted
Average Weighted Weighted
Range Of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Oustanding Life Price Exercisable Price
--------------- --------------- ----------------- -------------- --------------- -------------
$ 0.00 - $4.99 615 5.3 $ 2.87 455 $ 2.85
5.00 - 9.97 757 6.0 6.63 506 6.69
9.98 - 14.96 993 7.3 12.32 541 11.98
14.97 - 19.95 10 7.9 16.46 3 16.09
19.96 - 24.93 153 8.5 22.66 75 22.22
24.94 - 29.92 42 8.6 25.63 10 25.63
29.93 - 34.91 527 8.5 31.14 101 31.12
34.92 - 39.90 57 9.3 37.60 -- --
39.91 - 44.89 15 9.6 41.83 -- --
------ ---- -------- ----- -------
3,169 6.9 $ 13.54 1,691 $ 9.63
====== ==== ======== ===== =======
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:
F-18
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per-share amounts)
8. STOCK OPTION PLANS -- (CONTINUED)
Year Ended December 31
------------------------------
1997 1998 1999
---------- -------- --------
Net income:
As reported .......................... $ 8,733 $ 3,185 $ 40,205
Pro Forma ............................ 7,613 1,705 35,945
Basic net income per share:
As reported .......................... .28 .10 1.14
Pro forma ............................ .24 .05 1.02
Diluted net income per share:
As reported .......................... .26 .09 1.09
Pro forma ............................ .23 .05 0.98
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 an
expected life of five 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
------------------------------
1997 1998 1999
---------- -------- --------
Current:
State and local ............................. $ 1,176 $ 1,596 $ 4,256
Federal ..................................... 4,317 10,089 24,654
------- ------- --------
5,493 11,685 28,910
Deferred ....................................... (200) (3,213) (1,471)
------- ------- --------
$ 5,293 $ 8,472 $ 27,439
======= ======= ========
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
Year Ended December 31
------------------------------
1997 1998 1999
---------- -------- --------
Statutory federal income tax rate ............... 35.0% 35.0% 35.0%
Non-deductible merger costs ..................... -- 30.8 (0.2)
State income taxes, net of federal benefit ...... 3.0 3.7 4.1
Impact of Signal and TLF "S" Corporation status . (4.9) (4.4) --
Other ........................................... 4.6 7.6 1.7
----- ----- -----
37.7% 72.7% 40.6%
===== ===== =====
F-19
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per-share amounts)
9. INCOME TAXES (CONTINUED)
Signal and TLF were taxed as an "S" Corporation prior to their mergers with
MedQuist. Accordingly, the former Signal and TLF shareholders were taxed
individually on their companies' taxable income. Therefore, no tax provision is
included in the accompanying supplemental financial statements related to Signal
and TLF's net income (see Note 1).
The tax effected temporary differences that give rise to deferred income taxes
are as follows:
December 31
-----------------------
1998 1999
-------- --------
Deferred tax asset:
Restructuring accruals ..................... $ 2,722 $ 922
Accruals and reserves ...................... 3,716 7,703
Accumulated amortization ................... 1,124 1,431
Deferred compensation ...................... 289 146
------- --------
Total deferred tax assets ....... 7,851 10,202
------- --------
Deferred tax liability:
Accumulated depreciation ................... (1,725) (1,086)
Marketable security ........................ (315) (380)
Other ...................................... (1,354) (1,745)
------- --------
Total deferred tax liabilities .. (3,394) (3,211)
------- --------
Net deferred tax asset ....................... $ 4,457 $ 6,991
======= ========
10. COMMITMENTS AND CONTINGENCIES
Rent expense for operating leases was $4,599, $5,618 and $5,410 for the years
ended December 31, 1997, 1998 and 1999, respectively. Minimum annual rental
commitments for noncancelable operating leases having terms in excess of one
year as of December 31, 1999, are as follows:
2000 ........................ $ 5,532
2001 ........................ 4,055
2002 ........................ 2,870
2003 ........................ 1,598
2004 ........................ 555
2005 and thereafter ......... 302
--------
$ 14,912
========
F-20
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per-share amounts)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 $457 and $781 at December 31, 1998 and 1999, 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 $80, $125 and $177 in 1997, 1998 and 1999, respectively. The
Company issued approximately five thousand shares in 1997, 1998 and 1999, in
connection with the Company's matching contribution.
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 1997, 1998 and 1999, MRC made matching contributions
to the plans of $117, $114 and $98, 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, 15 and eight
common shares have been purchased in 1997, 1998 and 1999, respectively. The
Company has not charged any amounts to expense, relating to the SPP, in any of
the years presented, as amounts are immaterial to the financial statement as a
whole.
F-21
MEDQUIST INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(in thousands, except per-share amounts)
12. QUARTERLY SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)
Year Ended December 31, 1998: Three Months Ended
-------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- -------------- -------------
Revenues ........................................ $ 63,915 $ 66,870 $ 69,005 $ 71,865
Income (loss) before income taxes ............... 6,214 6,327 6,155 (7,039)(a)
Net income (loss) ............................... 4,004 3,969 3,776 (8,564)(a)
Basic net income (loss) per share ............... 0.12 0.12 0.12 (0.24)(a)
Diluted net income (loss) per share ............. 0.12 0.12 0.11 (0.24)(a)
Year Ended December 31, 1999: Three Months Ended
--------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- -------------- -------------
Revenues ........................................ $ 75,658 $ 79,983 $ 86,001 $ 88,366
Income before income taxes ...................... 11,991 15,043 18,462 22,148
Net income ...................................... 7,056 8,875 10,986 13,288
Basic net income per share ...................... 0.21 0.25 0.31 0.37
Diluted net income per share .................... 0.20 0.24 0.29 0.36
(a) Net loss recorded as a result of transaction costs and restructuring
charges.
F-22
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 Form 10-K, and have issued our report thereon dated February 8, 2000. 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 8, 2000
S-1
MEDQUIST INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Write-offs Balance at
beginning costs and other and cash end of
of period expenses Accounts Payments period
------------- ------------ ------------- ------------- ----------
Allowance for Doubtful Accounts
Year ended December 31, 1997 ............. $ 1,072 $ 812 $ 20 $ 606 $ 1,298
Year ended December 31, 1998 ............. 1,298 1,217 -- 241 2,274
Year ended December 31, 1999 ............. 2,274 3,149 648 (b) 2,512 3,559
Accrued Restructuring Costs:
Year ended December 31, 1997 ............. $ 870 $ 2,075 $ (289)(a) $ 923 $ 1,733
Year ended December 31, 1998 ............. 1,733 6,539 -- 1,497 6,775
Year ended December 31, 1999 ............. 6,775 (2,333) -- 1,386 3,056
(a) Reclassified to other long-term liabilities.
(b) Assumed in business acquisitions accounted for as purchase transactions.
S-2