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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, 2001 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) 810-8000
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 $325 million on March 19, 2002, 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 19, 2002 was 36,935,001.
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 2002 Annual Meeting.
1
PART I
Item 1. BUSINESS
MedQuist is a 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 9,800
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
3,200 clients nationwide through our client service centers. We also provide
reimbursement coding services, systems interfacing and equipment sales.
As a result of internal growth and acquisitions, our revenue has
increased from $84.6 million in 1997 (before restatements for acquisitions
accounted for as pooling of interests) to $405.3 million in 2001, of which over
97% is from medical transcription. Our experienced management team and operating
structure have enabled us to grow and take advantage of efficiencies such as a
larger network of transcriptionists and increased negotiating power with our
vendors.
History
MedQuist was incorporated in New Jersey in 1984 and reorganized in 1987
as a group of outpatient 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, 2001, we had
acquired 44 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 (HMO's), outpatient clinics and physician
practice groups are also expanding their use of transcribed medical reports.
Medical document management includes medical transcription plus other
services related to health care information management, such as digital
dictation systems and reimbursement coding services.
We believe the market for medical document management 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 and other document management services are critical to such
coordination.
2
Cost Containment. Outsourcing services in the healthcare industry is a
means to reduce administrative burdens and fixed costs. Hospitals and other
healthcare organizations often choose to outsource their electronic
transcription of dictated patient records as their information needs and volume
of dictated reports expand. Outsourcing medical document management 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.
Offer New Medical Document Management Services. We have developed, both
internally and through acquisition, the capability of providing additional
medical document management products and services such as digital dictation
systems and reimbursement coding services. We intend to further develop the
depth and breadth of this product and service line-up to better serve our
healthcare provider client base.
Extend Current Client Base. We will continue to extend our base of
traditional hospital clients and to pursue additional clients such as HMO's,
outpatient 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 grow our business and increase cash
flow from operations. We will continue to capitalize on our management
experience and operating expertise.
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.
3
Pursue Strategic Acquisitions. The medical transcription industry is
highly fragmented with more than 1,500 providers of outsourced medical
transcription services. The coding reimbursement industry is also highly
fragmented. Most of these are small companies that lack the financial resources
or the technological capabilities necessary to provide services nationwide. We
will continue to pursue acquisitions that will expand our client base, network
of qualified transcriptionists and other employees and geographic presence. We
will also explore select opportunities to acquire leading technologies, which
may enhance our service offering.
MedQuist Services
Through our approximately 9,800 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, HMO's,
physician practice groups and out-patient clinics.
We record 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 3,200 clients through 89 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.
MedQuist has started to offer reimbursement coding services for our
hospital customers. Coding reimbursement services involve the software assisted
manual assignment of numerical codes to identify the diagnosis, treatment and
severity of a medical episode for reimbursement purposes. Coded documents, such
as CPT and ICD-9 forms, are required for reimbursement by the government, HMO's
and insurance companies. In the future, MedQuist anticipates the addition of a
more automated coding service offering made available by the use of developing
technologies.
MedQuist also provides our healthcare customers with an industry
leading digital dictation systems solution as a result of our February 1, 2001
acquisition of Digital Voice, Inc.
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.
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.
4
We utilize a consultative sales and marketing approach by establishing
a working relationship with our clients through a series of direct meetings with
the chief financial officer, health information manager, chief information
officer and other key individuals at the client's organization. In this manner,
we obtain information concerning the particular needs of a client and educate
the client as to how our services can be customized to meet those needs. As part
of our marketing efforts, we also advertise in national healthcare trade
publications (including those sponsored by the American Health Information
Management Association) and participate in industry conventions.
Business Partners and Relationships
We are always evaluating emerging technologies and apply them as
appropriate to make our services more reliable, efficient and cost-effective,
and to assist our clients in meeting their transcription and document management
needs. We have initiated relationships with developers and end-users of emerging
technologies, such as voice-recognition, data mining and outcomes analysis and
Internet based telecommunications to create value added services for our clients
and to participate in the development of the computer based patient record. Our
Senior Vice President-New Business Development oversees our strategic
partnerships and manages our new business development department that integrates
these partnerships into useable product and service offerings.
Item 2. PROPERTIES
The Company owns one property in Madison, Wisconsin, which was acquired
through the stock purchase of L&H Medical Solutions Holding, Inc. Otherwise, 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 20,000 square feet
and is leased for a term ranging from three to ten years. The Company's
executive offices comprise 25,000 square feet and has two years remaining on its
lease. Management believes that there is adequate office space available should
the Company 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 management, 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 PRICE 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
2002. 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
2000
First Quarter $ 28.75 $ 19.94
Second Quarter 44.13 27.25
Third Quarter 34.81 17.94
Fourth Quarter 19.75 11.06
2001
First Quarter $22.13 $15.88
Second Quarter 29.99 20.00
Third Quarter 33.14 23.95
Fourth Quarter 30.62 21.30
2002
First Quarter (through March 19, 2002) 30.45 27.47
On March 19, 2002, the closing sale price for the Common Stock, as
reported on the Nasdaq National Market, was $30.31 per share.
We have never declared or paid any cash dividends on our Common 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.
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,
----------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- ---------
(In thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues $ 405,308 $364,149 $330,008 $271,655 $216,158
--------- -------- -------- -------- --------
Costs and expenses:
Cost of revenues, excluding depreciation 299,102 265,817 238,180 209,587 169,235
Selling, general and administrative 13,117 11,078 11,763 16,061 14,362
Depreciation 17,001 14,720 12,000 12,697 10,339
Amortization of intangible assets 9,398 7,335 5,333 3,757 5,652
Restructuring charges (credits) 868 (1,013) (2,333) 6,539 2,075
Other (income) expense (3,000) 6,255 (315) 11,682 --
--------- -------- -------- -------- --------
Total costs and expenses 336,486 304,192 264,628 260,323 201,663
--------- -------- -------- -------- --------
Operating income 68,822 59,957 65,380 11,332 14,495
Gain on sale of securities -- 3,672 309 -- --
Interest (expense) income, net 3,754 3,874 1,955 325 (469)
--------- -------- -------- -------- --------
Income before income taxes 72,576 67,503 67,644 11,657 14,026
Income tax provision 27,940 28,773 27,439 8,472 5,293
--------- -------- -------- -------- --------
Net income $ 44,636 $ 38,730 $ 40,205 $ 3,185 $ 8,733
========= ======== ======== ======== ========
Basic net income per common share $ 1.21 $ 1.07 $ 1.14 $ 0.10 $ 0.28
========= ======== ======== ======== ========
Diluted net income per common share $ 1.18 $ 1.04 $ 1.09 $ 0.09 $ 0.26
========= ======== ======== ======== ========
Balance Sheet Data:
As of December 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- ---------
(In thousands)
Working capital $ 135,703 $ 155,969 $ 99,354 $ 41,852 $ 36,608
Total assets 404,037 349,901 302,183 187,311 173,773
Long-term debt, net of current portion 1,088 22 452 215 7,589
Shareholders' equity 364,810 317,806 256,536 151,186 131,373
7
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.
Over 97% of our revenue in 2001 was derived from the provision of medical
transcription services, which we recognize when we render services and deliver
reports. These services are based primarily on contracted rates. We also derive
revenue from services other than traditional transcription services, such as
coding revenue, interfacing fees, equipment rentals, equipment sales, referral
fees and commissions from strategic partners. Revenues from these 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. Revenues 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,
technology development, repairs and maintenance, rent and other direct costs.
However, cost of revenue does not include depreciation. 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 2001, we completed 44 acquisitions. Six acquisitions,
including the December 1998 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,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Revenue 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenue, excluding depreciation 73.8 73.0 72.2
Selling, general and administrative 3.2 3.0 3.6
Depreciation 4.2 4.0 3.6
Amortization of intangible assets 2.3 2.0 1.6
Restructuring charges (credits) 0.2 (0.2) (0.7)
Other income (expense) (0.7) 1.7 (0.1)
----- ----- -----
Total costs and expenses 83.0 83.5 80.2
----- ----- -----
Operating income 17.0 16.5 19.8
Gain on sale of securities -- 1.0 0.1
Interest income, net 0.9 1.0 0.6
----- ----- -----
Income before income taxes 17.9 18.5 20.5
Income tax provision 6.9 7.9 8.3
----- ----- -----
Net income 11.0% 10.6% 12.2%
===== ===== =====
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues. Revenues increased 11.3% from $364.1 million in 2000 to
$405.3 million in 2001. The $41.2 million increase resulted from increased sales
to existing customers, sales to new customers and strategic partners and
additional revenue from acquisitions. The $41.2 million increase resulted from
$13.6 million of core growth and $27.6 million from large acquisitions.
Cost of Revenues, excluding depreciation. Cost of revenues increased
12.5% from $265.8 million in 2000 to $299.1 million in 2001. As a percentage of
revenues, cost of revenue increased from 73.0% in 2000 to 73.8% in 2001 due
primarily to an increase in payroll expense in 2001.
Selling, General and Administrative. Selling, general and
administrative expenses increased 18.4% from $11.1 million in 2000 to $13.1
million in 2001. As a percentage of revenue, selling, general and administrative
costs increased from 3.0% in 2000 to 3.2% in 2001. The increase primarily
resulted from increased spending to support our existing and new business.
Depreciation. Depreciation increased 15.5% from $14.7 million in 2000
to $17.0 million in 2001. As a percentage of revenue, depreciation increased
from 4.0% in 2000 to 4.2% in 2001. The increase resulted from increased capital
expenditures and fixed assets acquired in purchase business acquisitions in 2000
and 2001.
Amortization of Intangible Assets. Amortization of intangible assets
was $7.3 million in 2000 compared to $9.4 million in 2001. 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
2000 and 2001.
9
Restructuring Charges (Credits). In December 2001 we approved a
restructuring plan associated with the roll out of our new transcription
platform. When the plan was approved, we recorded a $1.5 million charge, of
which $1.4 million related to non cancelable lease obligations and $100,000
related to employee severance. As of December 31, 2001, $1.5 million was
included in accrued expenses related to this restructuring.
In November 2001, we completed the purchase of a medical transcription
company. In connection with this acquisition, we established a restructuring
reserve of $1.8 million. The reserve consists of $1.6 million for remaining
payments on non cancelable leases and $200,000 for severance.
In December 1998 a restructuring plan associated with the MRC
acquisition was approved. When the plan was approved we recorded a $6.5 million
charge. As of December 31, 2001, $671,000 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 --- (567) (410) (977)
1999 (437) (723) (17) (1,177)
2000 (556) (20) --- (576)
2001 (164) --- --- (164)
Revision to estimate recorded in 1999 (1,492) (182) (659) (2,333)
Revision to estimate recorded in 2000 (471) --- --- (471)
Revision to estimate recorded in 2001 (44) (126) --- (170)
------ ----- ----- ------
1998 Restructure accrual balance, at
December 31, 2001 $ 671 $ --- $ --- $ 671
====== ===== ===== ======
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. In 2001 and 2000,
MedQuist revised its estimate of the required reserves and reversed $430,000 and
$542,000, respectively of the 1997 restructure charge. As of December 31, 2001,
the accrual has been fully utilized.
Interest Income Net. We had net interest income of $3.9 million in 2000
and interest income of $3.8 million in 2001. The decrease is due to decreased
rates of return on liquid investments, partially offset by a greater amount of
cash available for investment.
Other (Income) Expense. During 2001, we settled a lawsuit, in our
favor, for a non-recurring gain of $3.0 million, net of legal expenses.
Income Tax Provision. The income tax provision decreased from $28.8
million or 42.6% of pre-tax income in 2000 to $27.9 million or 38.5% of pre-tax
income in 2001. The decrease primarily resulted from the majority of the tender
offer costs incurred in 2000 not being deductible for tax purposes, and state
tax planning.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues. Revenues increased 10.3% from $330.0 million in 1999 to
$364.1 million in 2000. The $34.1 million increase resulted from increased sales
to existing customers, sales to new customers and strategic partners and
additional revenue from acquisitions. The $34.1 million increase resulted from
$28.7 million of core growth and $5.4 million from large acquisitions.
10
Cost of Revenues, excluding depreciation. Cost of revenues increased
11.6% from $238.2 million in 1999 to $265.8 million in 2000. As a percentage of
revenues, cost of revenue increased from 72.2% in 1999 to 73.0% in 2000 due
primarily to an increase in transcription related payroll and benefit expense in
2000, partially offset by cost reductions resulting from consolidation of
duplicative facilities.
Selling, General and Administrative. Selling, general and
administrative expenses decreased 5.8% from $11.8 million in 1999 to $11.1
million in 2000. As a percentage of revenue, selling, general and administrative
costs decreased from 3.6% in 1999 to 3.0% in 2000. 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 increased 22.7% from $12.0 million in 1999
to $14.7 million in 2000. As a percentage of revenue, depreciation increased
from 3.6% in 1999 to 4.0% in 2000. The increase resulted from increased capital
expenditures and fixed assets acquired in purchase business acquisitions in 1999
and 2000.
Amortization. Amortization of intangible assets was $5.3 million in
1999 compared to $7.3 million in 2000. 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 1999 and 2000.
Restructuring Charges (Credits). 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, 2000,
$993,000 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, 2000, $1.0 million was included in accrued expenses related to the
restructuring.
Other (Income) Expense. In July 2000, Koninklijke Philips Electronics,
N.V. (Philips) completed a tender offer in which they acquired approximately 60
percent of MedQuist's outstanding common stock for $51.00 per share. In
association with this tender offer, MedQuist incurred approximately $6.3 million
of costs, primarily related to investment banker fees. In 1998, $11.0 million of
transaction costs associated with the 1998 pooling of interest combinations was
recorded. In 1999, $315,000 of these costs were reversed in connection with
adjustments to our accruals and reserves.
Gain on Sale of Securities. During 1999 and 2000, we had a gain of
$309,000 and $3.7 million, respectively, on the sale of securities resulting
from the exercise of warrants to purchase Lernout & Hauspie stock and subsequent
sale of the stock.
Interest Income, Net. We had interest income, net of $2.0 million in
1999 and interest income, net of $3.9 million in 2000. The increase was a result
of the investment of excess cash balances in 2000.
Income Tax Provision. The income tax provision increased from $27.4
million or 40.6% of pre-tax income in 1999 to $28.8 million or 42.6% of pre-tax
income in 2000. The increase resulted largely from the majority of the tender
offer costs incurred in 2000, not being deductible for tax purposes.
Liquidity and Capital Resources
At December 31, 2001, we had working capital of $135.7 million,
including $86.3 million of cash and cash equivalents. During the twelve months
ended December 31, 2001, our operating activities provided cash of $81.7 million
and during the twelve months ended December 31, 2000 our operating activities
provided cash of $60.5 million. The increase primarily resulted from increased
net income and liquidation of accounts receivable and prepaid expenses and an
increase in accrued expenses, partially offset by a reduced tax benefit for
exercise of employee stock options.
During the twelve months ended December 31, 2001, we used cash in
investing activities of $93.0 million, consisting of $14.1 million of capital
expenditures, and $77.3 million for acquisitions accounted for under the
purchase method. During the twelve months ended December 31, 2000, we used cash
in investing activities of $28.0 million, consisting of $17.5 million of capital
expenditures, $6.1 million investments in A-Life Medical, Inc. securities, $8.1
million for acquisitions accounted for under the purchase method and $728,000
for the purchase of securities, offset by $4.4 million in cash proceeds from the
sale of securities.
11
During the twelve months ended December 31, 2001, net cash provided by
financing activities was $231,000, consisting of $938,000 for repayment of long
term debt, partially offset by $1.2 million in proceeds from the issuance of
common stock including option exercises and issuances in connection with the
employee benefits plan. During the twelve months ended December 31, 2000, net
cash provided by financing activities was $2.8 million, consisting of $19.8
million in proceeds from the issuance of common stock including option exercises
and issuances in connection with employee benefit plans, partially offset by
$15.5 million from the purchase and retirement of MedQuist stock and $1.6
million for repayment of long-term debt.
In April 2000, we made a $6.1 million investment in A-Life Medical,
Inc., a leader in advanced natural language processing technology for the
medical industry. In September 2001, we advanced A-Life Medical, Inc. $1.0
million as a prepayment on a license agreement. In December 2001, we advanced
$674,000 to A-Life Medical, Inc. in connection with an additional investment
which closed in January 2002. Our investment in A-Life Medical, Inc. is
inherently risky due to the nature of its early stage development technology and
related uncertain near term opportunities. We will continue to monitor this
investment on a periodic basis. In the event the carrying value of the
investment exceeds the fair value of the investment and the decline is
determined to be other-than-temporary, an impairment charge will be recorded.
Fair value for A-Life Medical, Inc. is based on estimates and assumptions used
in forecasted financial models. In order to determine whether a decline in value
is other-than-temporary, we evaluate, among other factors: the duration and
extent to which the fair value has been less than carrying value; the financial
condition of the company, including key operational and cash flow metrics;
current market conditions, future trends and the business outlook for the
company; and our intent and ability to retain the investment for a period of
time sufficient to allow for any anticipated recovery in fair value.
We have previously accounted for the investment in A-Life under the
cost method. As a result of our increased ownership percentage from the January
2002 financing transaction, we will begin to account for the investment under
the equity method.
We believe that our cash and cash equivalent, on hand, and cash flow
generated from operations and our borrowing capacity will be sufficient to meet
our current working capital and capital expenditure requirements.
Impact of New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations consummated after
June 30, 2001 be accounted for under the purchase method of accounting. SFAS No.
142 requires goodwill and intangible assets with indefinite lives will no longer
be amortized, but are reviewed at least annually for impairment. The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, we are required to adopt SFAS No. 142 effective
January 1, 2002. Application of the non-amortization provisions of SFAS No. 142
for goodwill is expected to result in a decrease in amortization expense of
approximately $3.5 million in 2002. At December 31, 2001, we had goodwill of
approximately $110.6 million and during the twelve months ended December 31,
2001 we incurred approximately $3.4 million in amortization associated with
goodwill. Subsequent to June 30, 2001, we completed two purchase business
combinations resulting in goodwill of $21.3 million. Pursuant to SFAS No. 142,
we will test goodwill for impairment upon adoption and we do not expect that the
impairment test will result in any significant losses.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" (effective for fiscal
years beginning after June 15, 2002). SFAS No. 143 addresses accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and retirement of assets. We do not expect the adoption of SFAS No. 143
will have a significant impact on our financial position and results of
operations.
12
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which
establishes a single accounting model, based on the framework established in
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed
Of", and resolves significant implementation issues related to SFAS No. 121.
SFAS No. 144 superceded SFAS No. 121 and Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of a Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions". We are required to adopt SFAS No. 144 for
the fiscal year ending December 31, 2002, however, early application is
permitted. We do not believe that the adoption of SFAS No. 144 will have a
material impact on our financial condition or results of operations.
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, 2001. For investment securities, the table presents principal
amounts and related weighted average interest rates (dollars in thousands).
Cash and cash equivalents $86,334
Average interest rate 3.6%
At December 31, 2001, there exists $2.2 million in debt consisting
primarily of notes payable resulting from acquisitions, which will be paid out
in 2002 and 2003.
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. We also may have referred you to this note
in other written or oral disclosures we have made, such as our quarterly
earnings conference calls. 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 and other employees;
(2) inability to complete and assimilate acquisitions of businesses, especially
acquisitions of non-medical transcription businesses, because we have no prior
experience in such businesses; (3) dependence on our senior management team and
new senior management from non-medical transcription acquisitions; (4) the
impact of new services or products on the demand for our existing services; (5)
our current dependence on medical transcription for substantially all of our
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,
including, without limitation, the impact the Health Information Portability and
Accountability Act ("HIPAA") will have on our business; (11) infringement on the
proprietary rights of others; (12) our failure to comply with confidentiality
requirements; and (13) risks inherent in diversifying into other businesses,
such as from the acquisition of DVI (digital dictation equipment) and entering
into the medical record coding reimbursement business. When considering these
forward-looking statements, you should keep in mind these risk factors and the
other cautionary statements we may make in connnection with any such statements,
and you 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 or elsewhere.
13
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 F23.
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 2002 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 2002 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 2002 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 2002 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 Governance Agreement, dated as of May 22, 2000. Filed as an exhibit to the Solicitation/Recommendation
Statement on Schedule 14D-9, dated June 1, 2000, as amended, of Registrant and incorporated herein by
reference.
10.6 Licensing Agreement, dated as of May 22, 2000. Filed as an exhibit to the Solicitation/Recommendation
Statement on Schedule 14D-9, dated June 1, 2000, as amended, of Registrant and incorporated herein by
reference.
10.6.1 Amendment No. 1 to Licensing Agreement, dated as of January 1, 2002 [filed herewith].
*10.7 Shareholder Agreement, dated as of May 22, 2000, between MedQuist and David A. Cohen. Filed as an
exhibit to the Solicitation/Recommendation Statement on Schedule 14D-9, dated June 1, 2000, as
amended, of Registrant and incorporated herein by reference.
*10.8 Shareholder Agreement, dated as of May 22, 2000, between MedQuist and John A. Donohoe, Jr. Filed as an
exhibit to the Solicitation/Recommendation Statement on Schedule 14D-9, dated June 1, 2000, as
amended, of Registrant and incorporated herein by reference.
*10.9 Shareholder Agreement, dated as of May 22, 2000, between MedQuist and John M. Suender. Filed as an
exhibit to the Solicitation/Recommendation Statement on Schedule 14D-9, dated June 1, 2000, as
amended, of Registrant and incorporated herein by reference.
*10.10 Shareholder Agreement, dated as of May 22, 2000, between MedQuist and Ronald A. Scarpone. Filed as an
exhibit to the Solicitation/Recommendation Statement on Schedule 14D-9, dated June 1, 2000, as
amended, of Registrant and incorporated herein by reference.
*10.11 Shareholder Agreement, dated as of May 22, 2000, between MedQuist and Ethan Cohen. Filed as an exhibit
to the Solicitation/Recommendation Statement on Schedule 14D-9, dated June 1, 2000, as amended, of
Registrant and incorporated herein by reference.
15
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Exhibit No. Description
- ----------- -----------
*10.12 Shareholder Agreement, dated as of May 22, 2000, between MedQuist and John W. Quaintance. Filed as an
exhibit to the Solicitation/Recommendation Statement on Schedule 14D-9, dated June 1, 2000, as
amended, of Registrant and incorporated herein by reference.
*10.13 Employment Agreement, dated as of May 22, 2000, between MedQuist and David A. Cohen. Filed as
an exhibit to the Solicitation/Recommendation Statement on Schedule 14D-9, dated June 1, 2000, as
amended, of Registrant and incorporated herein by reference.
*10.14 Employment Agreement, dated as of March 15, 2002, between MedQuist and John A. Donohoe, Jr. [filed
herewith].
*10.15 Employment Agreement, dated as of May 22, 2000, between MedQuist and John M. Suender. Filed as an
exhibit to the Solicitation/Recommendation Statement on Schedule 14D-9, dated June 1, 2000, as
amended, of Registrant and incorporated herein by reference.
*10.16 Employment Agreement, dated as of May 22, 2000, between MedQuist and Ronald A. Scarpone. Filed
as an exhibit to the Solicitation/Recommendation Statement on Schedule 14D-9, dated June 1, 2000, as
amended, of Registrant and incorporated herein by reference.
*10.17 Employment Agreement, dated as of May 22, 2000, between MedQuist and Ethan Cohen. Filed as an exhibit
to the Solicitation/Recommendation Statement on Schedule 14D-9, dated June 1, 2000, as amended, of
Registrant and incorporated herein by reference.
*10.18 Employment Agreement, dated as of October 16, 2000 between the Company and Brian J. Kearns, filed
herewith.
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].
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)
99.1 Assurance Letter pursuant to SEC Release Nos. 33-8070; 34-45590; 35-27503; 39-2395; IA-2018; IC-25464;
FR-62; File No. S7-03-02 [filed 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 Information required in various Schedules is included in the notes to the Consolidated Financial Statements.
(c) Reports on Form 8-K
During the fourth quarter of 2001, the Company filed the following Reports on
Form 8-K;
October 24, 2001 relating to the Company's earnings release for the
quarter ended September 30, 2001.
* 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 20, 2002.
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
20, 2002.
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/Brian J. Kearns Senior Vice President, Treasurer and Chief
- ----------------------------- Financial Officer (principal financial
Brian J. Kearns officer and principal accounting officer)
Director
- -----------------------------
Hans M. Barella
/s/Belinda W. Chew Director
- -----------------------------
Belinda W. Chew
/s/William E. Curran Director
- -----------------------------
William E. Curran
/s/Wim Punte Director
- -----------------------------
Wim Punte
/s/Stephen H. Rusckowski Director
- -----------------------------
Stephen H. Rusckowski
/s/A. Fred Ruttenberg Director
- -----------------------------
A. Fred Ruttenberg
/s/Richard H. Stowe Director
- -----------------------------
Richard H. Stowe
/s/John H. Underwood Director
- -----------------------------
John H. Underwood
Director
- -----------------------------
Erik J. Westerink
17
MedQuist Inc. and Subsidiaries
Consolidated financial statements
As of December 31, 2001 and 2000
Together with auditors' report
Report of independent public accountants
To MedQuist Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of MedQuist Inc. (a
New Jersey corporation) and Subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
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 financial statements referred to above present fairly, in
all material respects, the financial position of MedQuist Inc. and Subsidiaries
as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Philadelphia, Pennsylvania
January 30, 2002
MedQuist Inc. and Subsidiaries
Table of contents
Consolidated balance sheets
As of December 31, 2001 and 2000 ..........................................1
Consolidated statements of operations
For the years ended December 31, 2001, 2000 and 1999 ......................2
Consolidated statements of shareholders' equity
For the years ended December 31, 2001, 2000 and 1999 ......................3
Consolidated statements of cash flows
For the years ended December 31, 2001, 2000 and 1999 ......................4
Notes to consolidated financial statements
December 31, 2001, 2000 and 1999 ..........................................5
MedQuist Inc. and Subsidiaries
Consolidated balance sheets
As of December 31, 2001 and 2000
(in thousands)
2001 2000
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 86,334 $ 77,321
Cash equivalent with related party -- 20,044
Accounts receivable, net 78,429 75,155
Deferred income taxes 6,178 5,553
Prepaid expenses and other 1,714 6,546
-------- --------
Total current assets 172,655 184,619
Property and equipment, net 34,167 35,013
Intangible assets, net 167,803 123,408
Deferred income taxes 20,197 --
Other 9,215 6,861
-------- --------
$404,037 $349,901
======== ========
Liabilities and shareholders' equity
Current liabilities:
Current portion of long-term debt $ 1,067 $ 433
Accounts payable 4,562 4,232
Accrued expenses 31,323 23,985
-------- --------
Total current liabilities 36,952 28,650
-------- --------
Long-term debt 1,088 22
-------- --------
Other long-term liabilities 1,187 704
-------- --------
Deferred income taxes -- 2,719
-------- --------
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock, no par value, 60,000 shares
authorized, 36,889 and 36,769 shares issued
and outstanding, respectively 225,503 223,286
Retained earnings 139,284 94,648
Deferred compensation (31) (128)
Accumulated other comprehensive income 54 --
-------- --------
Total shareholders' equity 364,810 317,806
-------- --------
$404,037 $349,901
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
MedQuist Inc. and Subsidiaries
Consolidated statements of operations
For the years ended December 31, 2001, 2000 and 1999
(in thousands, except per-share amounts)
2001 2000 1999
-------- -------- --------
Revenues $405,308 $364,149 $330,008
-------- -------- --------
Costs and expenses:
Cost of revenues, excluding
depreciation 299,102 265,817 238,180
Selling, general and
administrative 13,117 11,078 11,763
Depreciation 17,001 14,720 12,000
Amortization of intangible
assets 9,398 7,335 5,333
Restructuring charges
(credits) 868 (1,013) (2,333)
Other (income) expense (3,000) 6,255 (315)
-------- -------- --------
Total costs and expenses 336,486 304,192 264,628
-------- -------- --------
Operating income 68,822 59,957 65,380
Gain on sale of securities -- 3,672 309
Interest income, net 3,754 3,874 1,955
-------- -------- --------
Income before income taxes 72,576 67,503 67,644
Income tax provision 27,940 28,773 27,439
-------- -------- --------
Net income $ 44,636 $ 38,730 $ 40,205
======== ======== ========
Basic net income per
common share $ 1.21 $ 1.07 $ 1.14
======== ======== ========
Diluted net income per
common share $ 1.18 $ 1.04 $ 1.09
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
MedQuist Inc. and Subsidiaries
Consolidatedd statements of shareholders' equity
For the years ended December 31, 2001, 2000 and 1999
(in thousands)
Accumulated
Commmon stock other
----------------- Retained Deferred comprehensive
Shares Amount earnings compensation income Total
------ -------- -------- ------------ -------------- -------
Balance, December 31, 1998 33,258 $136,603 $ 14,536 $(538) $585 $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,
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
Adjustment for immaterial pooling-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 (291) 704 256,536
--------
Comprehensive income:
Net income -- -- 38,730 -- -- 38,730
Change in unrealized gain on available
for sale securities, net of tax -- -- -- -- (704) (704)
------ -------- -------- ----- ---- --------
Total comprehensive income -- -- 38,730 -- (704) 38,026
Exercise of Common stock options, including
tax benefit 1,381 37,025 -- -- -- 37,025
Shares repurchased and retired (600) (15,466) -- -- -- (15,466)
Amortization of deferred compensation -- -- -- 163 -- 163
Issuance of Common stock 86 1,522 -- -- -- 1,522
------ -------- -------- ----- ---- --------
Balance, December 31, 2000 36,769 223,286 94,648 (128) -- 317,806
--------
Comprehensive income:
Net income -- -- 44,636 -- -- 44,636
Cumulative translation adjustments -- -- -- -- 54 54
------ -------- -------- ----- ---- --------
Total comprehensive income -- -- 44,636 -- 54 44,690
Exercise of Common stock options,
including tax benefit 51 909 -- -- -- 909
Amortization of deferred compensation -- -- -- 97 -- 97
Issuance of Common stock 69 1,308 -- -- -- 1,308
------ -------- -------- ----- ---- --------
Balance, December 31, 2001 36,889 $225,503 $139,284 $ (31) $ 54 $364,810
====== ======== ======== ===== ==== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
MedQuist Inc. and Subsidiaries
Consolidated statements of cash flows
For the years ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
------- ------- -------
Operating activities:
Net income $ 44,636 $ 38,730 $ 40,205
Adjustments to reconcile net
income to net cash provided by
operating activities-
Depreciation and amortization 26,399 22,055 17,333
Gain on sale of securities -- (3,672) (309)
Amortization of deferred
compensation 97 163 247
Deferred income tax provision
(benefit) 57 2,797 (1,471)
Pension contribution payable in
Common stock 941 867 177
Stock-based compensation to
members of board of directors -- 311 68
Tax benefit from exercise of
employee stock options 239 17,720 9,496
Changes in assets and liabilities,
excluding effects of acquisitions:
Accounts receivable, net 6,763 1,071 (15,685)
Prepaid expenses and other 5,787 (6,349) 186
Other assets (571) 437 1,156
Accounts payable (2,770) (1,141) 183
Accrued expenses 92 (12,368) 8,065
Other long-term liabilities 483 (85) 92
--------- -------- ---------
Net cash provided by operating
activities 82,153 60,536 59,743
--------- -------- ---------
Investing activities:
Purchases of property and
equipment (14,058) (17,492) (14,169)
Acquisitions, net of cash acquired (77,737) (8,102) (48,405)
Purchase of investments -- (728) (472)
Investment in/advances to A-Life
Medical, Inc. (1,674) (6,051) --
Proceeds from sale of
investments -- 4,403 781
--------- -------- ---------
Net cash used in investing activities (93,469) (27,970) (62,265)
--------- -------- ---------
Financing activities:
Repayments of long-term debt (938) (1,568) (2,834)
Distributions -- -- (219)
Proceeds from exercise of
Common stock options 670 19,305 9,316
Net proceeds from issuance of
Common stock 499 504 42,347
Purchase and retirement of
Common stock -- (15,466) --
--------- -------- ---------
Net cash provided by financing
activities 231 2,775 48,610
--------- -------- ---------
Effect of exchange rate changes 54 -- --
--------- -------- ---------
Net increase (decrease) in cash,
cash equivalents and cash
equivalent with related party (11,031) 35,341 46,088
Cash, cash equivalents and cash
equivalent with related party,
beginning of year 97,365 62,024 15,936
--------- -------- ---------
Cash, cash equivalents and cash
equivalent with related party, end
of year $ 86,334 $ 97,365 $ 62,024
--------- -------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
MedQuist Inc. and Subsidiaries
Notes to consolidated financial statements
December 31, 2001, 2000 and 1999
(in thousands, except per-share amounts)
1. Background and summary of significant accounting policies:
Background
MedQuist Inc. (the Company or MedQuist) is the leading national provider of
medical transcription services to the healthcare industry in the United States.
MedQuist entered this business in May 1994 through the acquisition of a medical
transcription services company, and since this date has completed an additional
44 acquisitions and has integrated the acquired business into its operations.
The Company is a majority-owned subsidiary of Koninklijke Philips Electronics
N.V. (Philips) (see Note 13).
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 in consolidation.
Translation of foreign currency
The Company established a foreign subsidiary in the United Kingdom in 2001 which
uses the pound sterling as its functional currency. Assets and liabilities of
this subsidiary are translated at exchange rates in effect at the balance sheet
date, and income and expense accounts and cash flow items are translated at
average exchange rates during the period. The resulting translation adjustments
are recorded as a component of accumulated other comprehensive income within
shareholders' equity. Foreign exchange rate gains and losses included in
operating results are not material in 2001.
Use of estimates and assumptions
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States 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.
F-5
Cash and cash equivalents
Cash and cash equivalents include cash and highly liquid investments purchased
with an original maturity of three months or less, and consist primarily of cash
on deposit with banks. At times, cash balances held at financial institutions
are in excess of federally insured limits. The Company places its temporary cash
investments with high-credit, quality financial institutions and, by policy,
limits the amount of credit exposure to any one financial institution.
Management believes that no significant concentration of credit risk exists with
respect to these cash investments.
Interest income earned on investments in cash equivalents was $3,524, $3,915 and
$2,123 for the years ended December 31, 2001, 2000 and 1999, respectively.
Cash equivalent with related party
Cash equivalent with related party consisted of cash deposited with Philips for
the purpose of optimizing income from temporary excess cash. In the fourth
quarter of 2000, the Company began participating in a deposit facility
established by Philips which allowed investments up to $100 million to earn
interest at LIBOR less 0.125 percent, for periods up to 365 days. At December
31, 2000, the Company had $20,044 in such an investment. As the original
maturity of this investment was less than three months, the investment was
classified as a cash equivalent with related party in the accompanying
consolidated balance sheet as of December 31, 2000. The Company withdrew all
funds invested in this related-party deposit facility in the second quarter of
2001 and, at December 31, 2001, the Company had no such investment.
Interest income earned on cash deposited with Philips was $403 and $44 for the
years ended December 31, 2001 and 2000, respectively.
Investments in marketable securities
Investments in marketable securities are accounted for in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." In 2000 and 1999, the
Company had investments in marketable securities that were classified as
available-for-sale. As such, the securities were carried at fair value, based on
quoted market prices, with unrealized gains and losses reported as a component
of accumulated other comprehensive income within shareholders' equity.
During 2000 and 1999, the Company sold the marketable securities resulting in
gains of $3,672 and $309, respectively. No investments in marketable securities
were held at December 31, 2001 and 2000.
Property and equipment
Property and equipment are recorded at cost. Depreciation and amortization are
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 lesser of the lease term or useful life for leasehold
improvements. Repairs and maintenance costs are charged to expense as incurred,
while additions and betterments are capitalized. Gains or losses on disposals
are charged to operations.
F-6
Intangible assets
Intangible assets consist primarily of goodwill, customer lists, noncompete
agreements and employee bases. The goodwill related to the first acquisition of
a medical transcription business, which was completed in 1994, is being
amortized over 40 years. The goodwill related to subsequent acquisitions
completed from 1995 through June 30, 2001 is being amortized on a straight-line
basis over 20-30 years. Goodwill related to acquisitions subsequent to June 30,
2001 is not being amortized in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets." Customer lists are amortized over 10-20 years. Noncompete
agreements are amortized over the contractual terms, ranging from 1.5 to 4
years, and other intangibles are amortized over 3-5 years.
Long-lived assets
Pursuant to the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets and for Long-Lived Assets to Be
Disposed of," management continually evaluates whether 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, an estimate of the related undiscounted cash flows is
used in measuring whether the long-lived asset should be written down to fair
value. Measurement of the amount of the impairment is based on generally
accepted valuation methodologies, as deemed appropriate. As of December 31,
2001, management believes that no revision to the remaining useful lives or
write-down of long-lived assets is required.
Revenue recognition
The Company's revenue consists primarily of fees generated from providing
medical transcription services. Fees for medical transcription services are
generally based on contracted rates and revenue is recognized upon the rendering
of services and delivery of transcribed reports. Revenues are also derived from
equipment sales, 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 to consolidated revenues.
Advertising costs
The Company charges advertising costs to expense as incurred. Advertising
expense was $857, $626 and $524 for the years ended December 31, 2001, 2000 and
1999, respectively.
Income taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for 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
the respective tax bases. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-7
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 as
adjusted for the dilutive effect of Common stock equivalents, which consist
primarily of stock options, using the treasury stock method.
Fair value of financial instruments
Cash and cash equivalents, cash equivalent with related party, accounts
receivable, accounts payable and accrued expenses are reflected in the
accompanying consolidated financial statements at fair value due to the
short-term nature of these instruments. The carrying amount of debt obligations
approximates fair value at the balance sheet dates.
Stock options
The Company accounts for its stock option plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized for options issued at fair market value on
the date of grant. In 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 established a
fair value based method of accounting for stock-based compensation plans. SFAS
No. 123 requires that a company's financial statements include certain
disclosures about a stock-based employee compensation arrangement regardless of
the method used to account for the plan.
Comprehensive income
The Company follows SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and presentation of comprehensive income and
its components in financial statements. The Company's comprehensive income
consists of net income, unrealized holding gains on available-for-sale
securities and currency translation adjustments. The Company's comprehensive
income is presented within the accompanying Consolidated Statements of
Shareholders' Equity. At December 31, 1999, the Company had an unrealized pretax
gain on available-for-sale securities of $950, and the tax expense recorded on
the unrealized gain was $246. These securities were sold in 2000 and a gain was
realized. At December 31, 2001, the Company had a currency translation
adjustments of $54 relating to a subsidiary in the United Kingdom.
Segment information
The Company operates in one reportable segment.
F-8
Statements of cash flow information
For the years ended December 31, 2001, 2000 and 1999, the Company paid interest
of $86, $46 and $125, respectively, and income taxes of $21,222, $17,007 and
$15,016, respectively.
The following table displays the net noncash financing activities resulting from
the Company's business acquisitions (see Note 2):
Year ended December 31
---------------------------
2001 2000 1999
-------- ------ -------
Noncash net assets acquired $ 79,837 $8,102 $51,388
Less- Seller notes and
payables (2,100) -- (1,757)
Common stock issued -- -- (1,226)
-------- ------ -------
Net cash paid for business
acquisitions $ 77,737 $8,102 $48,405
======== ====== =======
Recent accounting pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires the use of the purchase method of accounting for
business combinations initiated after June 30, 2001, and expands the definition
of intangible assets that are to be recorded separately from goodwill. SFAS No.
142 requires that goodwill and certain intangible assets with an indefinite
useful life to no longer be amortized, but such intangibles are to be reviewed
for impairment at least annually and written down in periods in which the
recorded value exceeds fair value.
For goodwill and other intangible assets resulting from acquisitions completed
prior to July 1, 2001, the Company is required to follow the provisions of SFAS
No. 142 as of January 1, 2002, and, accordingly, goodwill will no longer be
amortized and impairment reviews will be periodically performed to assess
whether any write downs are required. The Company's consolidated balance sheet
at December 31, 2001 includes $89,290 (which is net of $14,543 of accumulated
goodwill amortization) of goodwill recognized as a result of the acquisitions
completed prior to July 1, 2001. In accordance with the provisions of these
statements, the Company continued to amortize this goodwill through the end of
2001, recognizing approximately $3,371, $2,680 and $2,410 of goodwill
amortization expense for the years ended December 31, 2001, 2000 and 1999,
respectively. Subsequent to June 30, 2001, the Company completed two purchase
business combinations which resulted in goodwill of $21,294. In accordance with
the provisions of SFAS No. 142, no goodwill amortization expense has been
recorded on these transactions.
While the Company has not yet completed all of the valuation and other work
necessary to adopt these accounting standards, management believes that, except
for the impact of discontinuing the amortization of goodwill, there will not be
a significant impact on the Company's consolidated financial position and
results of operations.
F-9
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which is effective for fiscal years beginning after June 15, 2002.
SFAS No. 143 addresses accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and retirement of assets.
Management does not expect that the adoption of SFAS No. 143 will have a
significant impact on the Company's consolidated financial position and results
of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which establishes a single accounting model,
based on the framework established in SFAS No. 121. SFAS No. 144 superceded SFAS
No. 121 and Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations-Reporting the Effects of a Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
The Company is required to adopt SFAS No. 144 for the year ending December 31,
2002; however, early application is permitted. Management does not believe that
the adoption of SFAS No. 144 will have a significant impact on the Company's
consolidated financial position and results of operations.
Reclassifications
Certain reclassifications have been made to the 1999 consolidated statement of
operations to conform to the current year presentation, as well as the 2000 and
1999 consolidated statement of cash flows.
2. Acquisitions:
In 2001, the Company completed seven acquisitions for an aggregate purchase
price of $79,417, consisting primarily of $77,317 in net cash payments and
$2,100 in notes due to the sellers. The acquisitions in 2001 were accounted for
under the purchase method of accounting.
In 2000, the Company completed eight acquisitions for an aggregate purchase
price of $8,102, which were all cash transactions. The acquisitions in 2000 were
accounted for under the purchase method of accounting.
In 1999, the Company completed 11 acquisitions, of which 10 were recorded under
the purchase method of accounting while the other acquisition was accounted for
as a pooling-of-interests. The 10 acquisitions accounted for under the purchase
method had an aggregate purchase price of $52,255, consisting primarily of
$49,272 in net cash, $1,757 in seller notes and 171 shares of Common stock with
a fair value of $1,226. The Company completed one acquisition accounted for as a
pooling-of-interests and prior period financial statements have not been
restated for this acquisition due to the immateriality of this transaction.
F-10
A summary of the allocation of the purchase price to net assets acquired is as
follows:
Year ended December 31,
------------------
2001 2000 1999
------ ----- ------
Purchase price:
Cash paid for acquisition
including transaction
costs $ 77,737 $ 8,102 $ 48,405
Notes due to sellers 2,100 -- 1,757
Common stock issued -- -- 1,226
---------- --------- ----------
$ 79,837 $ 8,102 $ 51,388
========== ========= ==========
Purchase price allocation:
Accounts receivable $ 10,037 $ 238 $ 7,287
Prepaid and other 955 -- 150
Property and equipment 2,097 526 2,463
Deposits 109 2 145
Deferred taxes 24,018 -- (124)
Intangible assets 53,793 7,427 46,365
Accounts payable (3,100) -- (180)
Accrued expenses (7,534) (50) (4,246)
Debt (538) (41) (472)
---------- --------- ----------
$ 79,837 $ 8,102 $ 51,388
========== ========= ==========
Pro forma information is not presented as these acquisitions are not material to
the consolidated statements of operations.
3. Restructuring charges:
In December 2001, management approved a restructuring plan associated with the
rollout of a new transcription platform. The plan includes the closure of
several operating facilities in order to improve operating efficiencies. Costs
associated with the plan of approximately $1,468 were recognized in 2001 in
accordance with Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." The components of the restructuring charge consist of $1,343 for
remaining payments on noncancelable leases and $125 for severance.
In November 2001, the Company completed the purchase of a medical transcription
company. In connection with this acquisition, the Company established a
restructuring reserve of $1,790. The reserve consists of $1,599 for remaining
payments on noncancelable leases and $191 for severance.
In December 1998, the Company's board of directors approved management's
restructuring plan associated with the merger with another entity, which merger
transaction was accounted for as a pooling-of-interests. 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 EITF 94-3. The significant components of the restructuring
charge consist of $3,835 for remaining payments on noncancelable leases, $1,618
for severance and $1,086 for noncancelable contracts and other exit costs. The
severance costs are attributable to 41 individuals from various levels of
operational and senior management.
F-11
From the date the restructuring charge was recorded in 1998 through December 31,
2001, the Company paid costs of $1,158 for noncancelable leases, $1,310 for
severance and $427 for noncancelable contracts and other exit costs.
In 1999, management revised the estimate of the required reserves and reversed
$2,333 of the 1998 restructuring charges relating to $1,492 of noncancelable
leases, $182 for severance and $659 for noncancelable contracts and other exit
costs. In 2000 and 2001, management further revised the estimate of the required
reserves and reversed $471 and $170, respectively, of the 1998 restructuring
charge. All of the reversal in 2000 relates to noncancelable leases as well as
$44 in 2001, while the balance in 2001 of $126 relates to severance.
In 1997, an acquired entity had approved a separate management plan to close
and/or merge several redundant operating facilities in order to reduce costs and
improve operating efficiencies. The plan was completed during 1998 and included
the cost of exiting certain facilities, primarily related to noncancelable
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 noncancelable lease costs. The
severance costs are attributable to eight individuals from various levels of
operational and senior management. In 2000 and 2001, management revised its
estimate of the required reserves and reversed $542 and $430, respectively, of
the 1997 restructuring charge. At December 31, 2001, the accrual has been fully
utilized.
4. Property and equipment:
December 31
------------------
2001 2000
------- -------
Furniture, equipment and software $ 95,845 $ 82,270
Leasehold improvements 3,673 2,971
-------- --------
99,518 85,241
Less- Accumulated depreciation and
amortization (65,351) (50,228)
-------- --------
$ 34,167 $ 35,013
======== ========
Depreciation and amortization expense was $17,001, $14,720 and $12,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
F-12
5. Intangible assets:
December 31
------------------------
2001 2000
-------- --------
Goodwill (amortizable) $103,833 $ 86,884
Goodwill (non-amortizable) 21,294 --
Customer lists 59,909 51,594
Noncompete agreements 10,663 7,016
Other 7,704 4,116
-------- --------
203,403 149,610
Less- Accumulated amortization (35,600) (26,202)
-------- --------
$167,803 $123,408
======== ========
December 31, 2001
-------------------------------------------------------
Accumulated Net book
Life Cost amortization value
------------ -------- ------------ --------
Goodwill
(amortizable) 20-40 years $103,833 $ (14,543) $ 89,290
Goodwill (non-
amortizable) -- 21,294 -- 21,294
Customer lists 10-20 years 59,909 (9,758) 50,151
Noncompete
agreements 1.5-4 years 10,663 (6,673) 3,990
Other 3-5 years 7,704 (4,626) 3,078
-------- --------- --------
$203,403 $ (35,600) $167,803
======== ========= ========
Amortization of all intangible assets was $9,398, $7,335 and $5,333 for the
years ended December 31, 2001, 2000 and 1999, respectively.
6. Investment:
On April 6, 2000, the Company made a $6,051 investment in A-Life Medical, Inc.
(A-Life), a privately held entity that is a leader in advanced natural language
processing technology for the medical industry. The investment has been recorded
under the cost method of accounting as the Company owns 19.5 percent of A-Life's
outstanding voting shares and has no control of this entity.
In September 2001, the Company advanced $1,000 to A-Life as a prepayment on a
license agreement. In December 2001 and January 2002, the Company advanced an
aggregate of $783 to A-Life in connection with an additional equity investment
that closed in January 2002. The initial investment and the subsequent advances
have been classified as other assets in the accompanying consolidated balance
sheet.
F-13
In January 2002, the Company's investment increased to 28 percent of the
outstanding voting shares of A-Life and, as such, the investment will be
accounted for under the equity method of accounting. As A-Life's net book value
is negative, the $6,834 carrying value of the equity investments made will be
allocated to intangible assets. The intangible assets, other than goodwill, will
be amortized over the estimated useful life of such assets beginning in January
2002. In the event the carrying value of the investment exceeds the fair value
of the investment and the decline is determined to be other-then-temporary, an
impairment charge will be recorded.
The Company received approximately $16 and $100 of services from A-Life during
the years ended December 31, 2001 and 2000, respectively.
7. Accrued expenses:
December 31
-------------------
2001 2000
------ ------
Accrued payroll and related taxes $15,764 $12,075
Restructuring charges 3,844 1,449
Income taxes payable 1,271 --
Other employee related expenses 2,318 2,318
Insurance reserves 236 2,100
Other 7,890 6,043
------- -------
$31,323 $23,985
======= =======
8. Valuation account and restructuring accruals:
Year ended December 31
-------------------------------
2001 2000 1999
------- ------- ------
Allowance for doubtful
accounts:
Balance at beginning of year $ 4,674 $ 4,668 $ 2,274
Provision 940 1,015 4,258
Acquisitions (Note 2) 541 -- 648
Charges (1,007) (1,009) (2,512)
------- ------- --------
Balance at end of year $ 5,148 $ 4,674 $ 4,668
======= ======= ========
Restructuring accruals
(Note 3):
Balance at beginning of year $ 1,449 $ 3,055 $ 6,775
------- ------- --------
Provision 1,468 -- --
Adjustments-
1998 restructuring (170) (471) (2,333)
1997 restructuring (430) (542) --
------- ------- --------
Net charge to operations 868 (1,013) (2,333)
------- ------- --------
Acquisition 1,790 -- --
------- ------- --------
Charges-
2001 restructuring (85) -- --
1998 restructuring (165) (576) (1,177)
1997 restructuring (13) (17) (210)
------- ------- --------
Total charges (263) (593) (1,387)
------- ------- --------
Balance at end of year $ 3,844 $ 1,449 $ 3,055
======= ======= ========
F-14
The restructuring accruals at December 31, 2001 consist of the following
components:
Restructuring reserve
-------------------------------
2001 1998 1997 Total
------ ---- ----- ------
Severance $ 316 $ -- $ -- $ 316
Noncancelable
leases 2,857 671 -- 3,528
------ ---- ----- ------
$3,173 $671 $ -- $3,844
====== ==== ===== ======
9. Long-term debt:
December 31
-----------------
2001 2000
----- -----
Seller notes $2,100 $ 357
Capital lease obligations 15 73
Other 40 25
------ -----
2,155 455
Less- Current portion (1,067) (433)
------- -----
$1,088 $ 22
====== =====
The Company had a credit facility that provided for a $10 million unsecured
senior revolving line of credit. The credit facility expired on April 23, 2000.
Interest expense on debt obligations was $173, $85 and $168 for the years ended
December 31, 2001, 2000 and 1999, respectively.
Long-term debt as of December 31, 2001, matures as follows:
2002 $1,067
2003 1,034
2004 29
2005 25
------
$2,155
======
F-15
10. Commitments and contingencies:
Rent expense for operating leases was $8,233, $6,969 and $5,410 for the years
ended December 31, 2001, 2000 and 1999, respectively. Minimum annual rental
commitments for noncancelable operating leases having terms in excess of one
year as of December 31, 2001, are as follows:
2002 $ 8,421
2003 5,884
2004 2,997
2005 1,515
2006 813
2007 and thereafter 1,299
----------
$ 20,929
==========
The Company has an employment agreement, as amended, with a former chief
executive officer. 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 $629 and $704 at December 31, 2001
and 2000, 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 employment agreements with six executive officers, which expire
at various times through June 2003, subject to renewal. These agreements provide
an aggregate base compensation of $1,475 both in the years ended December 31,
2002 and 2003, plus incentive compensation based on a percentage of the
executive's salary. These agreements also provide for certain other fringe
benefits and payments upon termination of the agreements.
The Company has severance agreements with certain executive officers that
provide for one-time payments in the event of a change in control, as defined,
if the officer is terminated within 12 months of the change. The payments range
from 18-24 months of cash compensation paid to the executive officers in the
fiscal year immediately prior to the change in control event. If the change in
control had occurred on December 31, 2001, and the executive officers had been
terminated the payments would have aggregated $3,686.
In the normal course of business, the Company is 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 consolidated financial position and results
of operations.
11. Shareholders' equity:
In May 1999, the Company consummated a secondary public offering of its Common
stock, selling 800 shares at $33.63 per share. In June 1999, the underwriters
exercised their over allotment option for an additional 505 shares. After
deducting the underwriters' discount and offering expenses, the net proceeds to
the Company were $41,858.
F-16
During the year ended December 31, 2000, the Company repurchased 600 shares of
outstanding Common stock for $15,466 at an average of $25.78 per share. All
Common stock acquired was subsequently retired.
In 2000 and 1999, the Company issued 22 and 2 shares of Common stock to members
of the board of directors, respectively. The fair value of the stock grants was
$311 in 2000 and $68 in 1999.
The Company also has a plan whereby certain non-employee members of the Board of
Directors have been granted Common stock but the shares will not be issued until
the director terminate membership on the Board. Stock granted in 2001, 2000 and
1999 were 3, 1 and 1, respectively, with a value of $54, $36 and $36. Total
accrued costs for this plan are $170 at December 31, 2001.
12. 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 issued at the fair
market value of the Common stock on the date of grant 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, an entity acquired by the Company, which acquisition was
accounted for as a pooling-of-interests, issued 165 stock options to employees
with exercise prices below the fair market value of the Common stock on the date
of grant. Accordingly, deferred compensation totaling $1,078 was recorded, of
which $97, $163 and $247 was amortized to expense in 2001, 2000 and 1999,
respectively, and $31 remains unamortized at December 31, 2001.
Information with respect to the Company's Common stock options is as follows:
Exercise price Aggregate
Shares per share proceeds
------ --------------- --------
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
Granted 2,056 17.06 - 70.00 105,380
Exercised (1,381) 1.67 - 44.00 (19,305)
Canceled (244) 5.21 - 70.00 (7,295)
------ --------------- --------
Outstanding,
December 31, 2000 3,600 2.17 - 70.00 121,685
Granted 1,190 16.00 - 43.50 26,675
Exercised (51) 5.21 - 24.94 (670)
Canceled (165) 10.48 - 70.00 (7,410)
------ --------------- --------
Outstanding,
December 31, 2001 4,574 $ 2.17 - 70.00 $140,280
====== =============== ========
F-17
At December 31, 2001, there were 2,037 exercisable options with an aggregate
exercise price of $42,032 and 1,622 additional options available for grant under
the plans. Exercisable options at December 31, 2000 and 1999 were 1,523 and
1,691 with an aggregate exercise price of $21,024 and $16,275, respectively.
A summary of outstanding options and exercisable options at December 31, 2001 is
as follows:
Options outstanding Options exercisable
-------------------------------------------- ------------------------
Weighted-
average Weighted- Weighted-
remaining average average
Number of contractual exercise Number of exercise
Range of exercise prices shares life price shares price
------------------------ ------------- ----------- ---------------- --------- -----------
$ 0.00 - $ 2.17 30 2.4 $ 2.17 30 $ 2.17
2.17 - 5.43 334 3.5 3.22 334 3.22
5.43 - 13.53 615 4.7 7.72 571 7.51
13.53 - 33.83 2,117 7.7 22.46 764 22.77
33.83 - 70.00 1,478 8.4 38.75 338 56.77
------ ------
4,574 7.2 30.67 2,037 20.64
====== ======
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
reduced to the following pro forma amounts:
Year ended December 31
-------------------------
2001 2000 1999
------ ------- -------
Net income:
As reported $44,636 $38,730 $40,205
Pro forma 35,934 34,447 35,945
Basic net income per share:
As reported 1.21 1.07 1.14
Pro forma 0.98 0.95 1.02
Diluted net income per
share:
As reported 1.18 1.04 1.09
Pro forma 0.95 0.93 0.98
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.
F-18
The fair value of the options granted is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
Year ended December 31
----------------------------------
2001 2000 1999
------- ------- -------
Risk-free interest rate 5.92% 6.17% 5.87%
Volatility 56% 55% 55%
Expected dividend yield 0% 0% 0%
Expected option life 5 years 5 years 5 years
13. Other income (expense):
In the first quarter of 2001, the Company received net proceeds of $3,000 in
connection with the settlement of a lawsuit.
In the third quarter of 2000, Philips completed a tender offer in which it
acquired approximately 60 percent of the Company's outstanding Common stock for
$51.00 per share. In connection with this tender offer, the Company incurred
approximately $6,255 of costs, primarily related to investment banker fees.
Since July 2000, Philips has purchased additional shares in the open market, at
various prices, thereby increasing its ownership in the Company to approximately
70 percent.
In 1999, the Company reversed $315 of transaction costs previously accrued in
connection with an acquisition completed in 1998 that was accounted for under
the pooling-of-interest method of accounting.
14. Income taxes:
The income tax provision consists of the following:
Year ended December 31
-----------------------------
2001 2000 1999
------ ------ ------
Current:
State and local $ 3,099 $ 3,196 $ 4,256
Federal 24,784 22,780 24,654
------- ------- -------
27,883 25,976 28,910
------- ------- -------
Deferred:
State and local 462 263 (18)
Federal (405) 2,534 (1,453)
------- ------- -------
57 2,797 (1,471)
------- ------- -------
$27,940 $28,773 $27,439
======= ======= =======
F-19
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
Statutory federal income tax
rate 35.0% 35.0% 35.0%
Nondeductible transaction
costs -- -- (0.2)
State income taxes, net of
federal benefit 3.4 3.5 4.1
Other 0.1 4.1 1.7
---- ---- ----
38.5% 42.6% 40.6%
===== ===== =====
The tax affected temporary differences that give rise to deferred income taxes
are as follows:
December 31
-------------------
2001 2000
------ ------
Deferred tax assets:
Fixed assets $ 184 $ --
Intangibles 22,372 5,474
Foreign net operating loss carryforwards 2,049 --
Restructuring accruals 822 586
Accruals and reserves 3,548 5,192
Deferred compensation 456 279
Other 387 --
------- -------
Total deferred tax assets 29,818 11,531
------- -------
Deferred tax liabilities:
Fixed assets -- (1,759)
Intangibles -- (4,943)
Other (406) (1,995)
------- -------
Total deferred tax liabilties (406) (8,697)
------- -------
Valuation allowance (3,037) --
------- -------
Net deferred tax assets $26,375 $ 2,834
------- -------
In connection with a purchase business combination completed in November 2001,
the Company acquired $24,018 in net deferred tax assets. Management believes
that $3,037 of these acquired deferred tax assets will not be realized.
Accordingly, the Company recorded a valuation allowance for this amount. This
allowance was established in purchase accounting.
In prior years, the Company completed two acquisitions that were accounted for
as poolings-of-interest for financial reporting purposes and as taxable purchase
transactions for income tax purposes. Deferred tax assets were recognized upon
consummation of these transactions with an offsetting credit to equity. The
Company is deducting the amortization of the intangible assets recorded for tax
purposes and recording a reduction of current taxes payable and the deferred tax
assets previously recorded.
F-20
Realization of the Company's remaining net deferred tax assets is dependent on
future taxable income. Management believes that such assets will be realized;
however, ultimate realization could be negatively impacted by market conditions
and other variables not known or anticipated at this time.
15. Earnings per share:
The table below sets forth the reconciliation of the numerators and denominators
of the Company's basic and diluted income per share computations for the years
ended December 31, 2001, 2000 and 1999.
Per share
Net income Shares amount
---------- ------ ---------
2001
Basic $ 44,636 36,842 $ 1.21
=========
Effect of dilutive securities -- 876
---------- ------
Diluted $ 44,636 37,718 $ 1.18
========== ====== =========
2000
Basic $ 38,730 36,154 $ 1.07
=========
Effect of dilutive securities -- 1,015
---------- ------
Diluted $ 38,730 37,169 $ 1.04
========== ====== =========
1999
Basic $ 40,205 35,120 $ 1.14
=========
Effect of dilutive securities -- 1,609
---------- ------
Diluted $ 40,205 36,729 $ 1.09
========== ====== =========
For the years ended December 31, 2001, 2000 and 1999, 2,608, 2,055 and 72 Common
stock options, respectively, were excluded from the diluted computation because
the effect would be anti-dilutive.
16. 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 percent
of their compensation on a pretax basis. The Company matches 50 percent of the
participant's contribution, up to 5 percent of the participant's total
compensation. The matching contribution is made on a quarterly basis using the
Company's Common stock. The charge to operations for the Company's matching
contributions was $941, $867 and $177 in 2001, 2000 and 1999, respectively. The
Company issued 34 shares in 2001, 27 shares in 2000 and 5 in 1999, in connection
with the Company's matching contribution, with a value of $809, $707 and $185,
respectively. The Company's matching contribution for the fourth quarter of 2001
will be made in the first quarter of 2002.
F-21
Stock purchase plan
All full-time employees except those who own 5 percent or more of the 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 percent of their earnings for the purchase of the stock. The
purchase price of the Common stock is determined by the Compensation Committee
but shall not be less than 85 percent of the fair market value of the Common
stock. Through the SPP, 35, 21 and 8 Common shares were purchased in 2001, 2000
and 1999 at a total purchase price of $499, $504 and $236, respectively.
17. Related-party transactions:
In April 2001, the Company began procuring liability insurance through Philips.
In addition, the Company entered into an agreement with Philips which allows the
Company to purchase certain products at a discount from Philips. The Company
paid $50 under this agreement in 2001.
The Company also paid Philips $1,933 and $500 during 2001 and 2000,
respectively, related to a licensing agreement entered into to provide for the
integration and use of certain of Philips' speech recognition technology into
the Company's business. This agreement was amended effective January 1, 2002 and
requires the Company to make an upfront payment of $150 and a fee based on a per
payroll line basis. The amended agreement expires on May 22, 2005.
A member of the Company's board of directors is a partner in a law firm that has
engaged to act as special counsel in certain matters. During the years ended
December 31, 2001, 2000 and 1999, the Company paid this firm $1,055, $373 and
$79, respectively.
18. Quarterly supplemental financial data (unaudited):
The following tables present certain unaudited consolidated quarterly financial
information for each of the eight quarters in the period ended December 31,
2001. In the opinion of management, this quarterly information has been prepared
on the same basis as the consolidated financial statements and includes all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the information for the periods presented. The results of
operations for any quarter are not necessarily indicative of the results for the
full year or for any future period.
Three months ended
----------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Year ended December 31, 2001:
Revenues $ 95,099 $ 97,978 $ 102,695 $ 109,536
Income before income taxes 20,922 17,297 17,657 16,700
Net income 12,867 10,638 10,860 10,271
Basic net income per common share 0.35 0.29 0.29 0.28
Diluted net income per common share 0.34 0.28 0.29 0.27
Year ended December 31, 2000:
Revenues 92,512 90,989 90,648 90,000
Income before income taxes 23,720 19,351 9,109 15,323
Net income 14,232 11,611 3,534 9,353
Basic net income per common share 0.40 0.33 0.10 0.25
Diluted net income per common share 0.39 0.31 0.10 0.25
F-22
The Company recorded a pretax gain of $3,000 in the first quarter of 2001 in
connection with the settlement of a lawsuit (see Note 13) and recorded a pretax
restructuring charge of $1,468 in the fourth quarter of 2001 (see Note 3). In
the third quarter of 2000 the Company recorded pretax tender offer costs of
$6,255 (see Note 13).
F-23